BANCROFT 
LIBRARY 


THE  LIBRARY 

OF 

THE  UNIVERSITY 
OF  CALIFORNIA 


MONETARY    REFORM     FOR     NICARAGUA 


REPORT 


Presenting  a 

PLAN  OF  MONETARY  REFORM 
FOR  NICARAGUA 

Submitted  to 

Messrs.  BROWN  BROTHERS  &  COMPANY 

and 
Messrs.  J.  &  W.  SELIGMAN  &  COMPANY 


by 


Messrs,  F.  G.  HARRISON 

and  CHARLES  A.  GONANT 


APRIL  23,    1912 


WILLIAM    R.   riCKC   CO.,   PRINTERS,    NEW  YORK 


.MONETARY    REFORM     FOR     NICARAGUA 

REPORT 

Presenting  a 

PLAN   OF  MONETARY  REFORM 
FOR  NICARAGUA 

Submitted  to 


Messrs.  BROWN  BROTHERS  &  COMPANY 

and 
Messrs.  J.  &  W.  SELIGMAN  &  COMPANY 


by 


Messrs.  R  C. /HARRISON 

and  CHARLES  A.  CONANT 


APRIL   23,    1912 


TABLE    OF    CONTENTS. 


TEXT  OF  THE  REPORT: 

I. — Introductory  Statement 1 

II.— The  Problem  to  Be  Dealt  With 2 

III.— The  Plan  of  Reform  Put  in  Operation 2 

iy._The  New  Unit  of  Value 4 

V. — History  of  the  Paper  Issues 5 

VI. — Fluctuations  in  the  Paper  Exchange 12 

VII. — Existing  Methods  of  Dealing  in  Exchange  16 

VIII. — The  Amount  of  Currency  a  Country  Needs  20 

IX.— Determination  of  the  Rate  of  Exchange 22 

X. — Reasons   for  Recommending  the  Rate  of 

1250 23 

XL — Suspension  of  Further  Currency  Issues 29 

XII.— Method  of  Obtaining  Stability  of  Exchange  30 

XIII.— Cost  of  the  Operation 32 

XIV. — Recommendation    to    Introduce    the    Ex- 
change Standard 34 

XV. — Application  to  the  Present  Case 36 

XVI. — Management  of  the  Exchange  Fund 37 

XVII. — Silver  and  Fractional  Currency 39 

XVIII.— Weight   and   Fineness   of   the   Fractional 

Currency  _  42 

XIX. — Principles  of  the  Note  Issue 46 

XX. — Limitations  of  the  Exchange  Standard  Sys- 
tem   „ ~ „. 48 

XXL— Methods  of  Securing  Notes „ 50 

XXII. — Provisions  for  Obtaining  Elasticity _  54 

XXIIL— Liability  for  Notes L 56 

XXIV. — Financial  Arrangements  with  the  Govern- 
ment  57 

XXV. — Transition  to  the  New  Money „„ 60 

APPENDICES. 

Appendix  A. — TABLES  ACCOMPANYING  THE  REPORT 63 

Appendix  B. — ADDKESS  TO  THE  PBESIDENT  OF  TB:E  HE- 
PUBLIC,  December  15,  1911 66 


ii  TABLE  OF  CONTENTS. 

PAGE 

Appendix  C. — THE  MONETARY  LAW  OF  MARCH  20, 1912. 

1.  Message  of  the  President,  February  29, 1912, 

Transmitting  the  Monetary  Plan  to  the 
National  Assembly  _ 67 

2.  Letter  of   February   15,   Transmitting   the 

Monetary  Plan  to  the  Minister  of  Finance    69 

3.  Text  of  the  Law  of  March  20,  1912,  in  Eng- 

lish and  Spanish  71 

Appendix  D. — AGREEMENT  IN  RELATION  TO  SUSPEND- 
ING FURTHER  ISSUES  OF  PAPER  CUR- 
RENCY. 

1.  Letter  of  January  5,  1912,  on  Behalf  of  the 

Bankers,  to  the  President  of  the  Republic    81 

2.  Eeply  of  the  President,  January  6,  1912 83 

Appendix  E. — EVIDENCE  AND  MEMORIALS. 

1.  Memorial    of    Leading    Merchants    Recom- 

mending an  Exchange  Rate  of  1000 84 

2.  Memorial  of  Merchants  of  Rivas 90 

3.  Memorial    of   Merchants    and   Planters    of 

Leon 92 

4.  Statement  of  A.  J.  Martin,  Manager  of  the 

Banco   Comercial  de  Nicaragua 93 

5.  Statement  of  N.  H.  Lawder,  General  Man- 

ager of  Belanger's,  Incorporated,  and 
Agent  in  Bluefields  of  the  Atlantic  Fruit 
&  Steamship  Company  100 

6.  Statement    of    E.    Palazio,    Importer    and 

Banker  105 

7.  Statement  of  Angel  Caligaris,  Coffee  Planter  109 

8.  Statement  of  Adan  Saenz  112 

9.  Statement  of  Jacobo  Tefels  115 

10.  Statement    of    Herbert    I.    Thompson,    of 

Labern  &  Thompson  117 

11.  Statement  of  Don  F.  Alfredo  Pellas,  Planter 

and  Capitalist  .  119 


TABLE  OP  CONTENTS.  Ill 

PAGE 

12.  Statement  of  Nicolas  A.  Delaney  . 123 

13.  Letter  of  Alberto  Lopez,  C 124 

14.  Letter  of  Luciano  Gomez,  Former  Minister 

of  Finance . , 126 

Appendix  F. — OPERATION  OF  THE  PHILIPPINE  COINAGE 
SYSTEM. 

Special  Despatch  to  Financial  America,  May  13, 

1912  ..  .  129 


Plan  of  Monetary  Reform  for  Nicaragua 


NEW  YORK,  April  23,  1912. 

I.— INTRODUCTORY  STATEMENT. 

DEAR  SIRS: 

We  beg  to  submit  herewith  our  report  under  Article 
8  of  the  Treasury  Bills  Agreement  of  September  1,  1911, 
between  your  banking  houses  and  the  Republic  of  Nic- 
aragua, relating  to  the  introduction  and  maintenance  of 
a  stable  currency  system  in  that  country  and  dealing 
incidentally  with  its  finances. 

In  compliance  with  your  instructions,  we  sailed  from 
New  York  on  Thursday,  November  23,  1911,  reached 
Panama  on  November  30th  following,  where  we  were  de- 
tained until  Saturday,  December  9th,  and  arrived  at 
Managua,  the  capital  of  Nicaragua,  on  the  14th.  Through 
Mr.  Gunther,  the  United  States  Charge  d 'Affaires,  an  ar- 
rangement was  made  for  a  conference,  on  the  next  day, 
December  15th,  at  11  a.  m.,  with  the  President  of  the 
Eepublic  Don  Adolf o  Diaz,  the  Minister  of  Finance  Don 
Pedro  Rafael  Cuadra,  the  Minister  of  War  General  Luis 
Mena,  and  the  President  of  the  National  Assembly  Don 
Ignacio  Suarez,  at  which  several  sub-secretaries  assisted. 

An  address  hi  Spanish,*  expressing  our  desire  to  be 
of  service  to  Nicaragua,  was  read  to  the  President,  to 
which  a  cordial  response  was  made  by  the  Minister  of 
Finance,  every  indication  being  given  of  friendly  co- 
operation. This  was  one  of  several  conferences  held 

*Printed  as  Appendix  B  to  this  report. 


with  the  President,  the  Minister  of  Finance,  and  the  Min- 
ister of  War,  many  more  being  held  with  the  Minister 
of  Finance  alone,  in  regard  to  monetary  reform  and  the 
improvement  of  general  financial  conditions. 

II. — THE  PROBLEM  TO  BE  DEALT  WITH. 

The  mam  problem  before  us  awaiting  solution  was  to 
replace  a  depreciated,  inconvertible  paper  currency  by 
a  sound  monetary  system.  During  the  five  years  ending 
with  1906,  the  amount  of  paper  currency  in  circulation 
in  Nicaragua  had  remained  comparatively  stationary, 
being  on  December  31,  1906,  7,896,905  pesos.  This 
amount  was  increased  by  comparatively  moderate  sums 
down  to  the  outbreak  of  revolution  in  1909,  when  large 
issues  were  made,  first  by  the  government  of  President 
Zelaya,  then  by  his  successor  of  his  own  party,  President 
Madriz,  and  later  by  the  new  government  under  Presi- 
dents Estrada  and  Diaz.  By  these  new  issues,  the  net 
circulation  outstanding  was  made  to  stand  at  the  close 
of  1909  at  12,149,000  pesos,  at  the  close  of  1910  at  30,- 
952,000  pesos;  and  at  the  close  of  1911  at  48,557,000 
pesos;  and  the  rate  of  exchange  rose  from  520  in  1906 
to  above  2,000  in  1911. 

How  to  convert  this  excessive  mass  of  paper  into  a 
quantity  adequate,  and  no  more  than  adequate,  to  the 
needs  of  the  country,  and  to  keep  the  currency  in  the 
future  at  a  fixed  value  in  gold,  was  the  essence  of  the 
problem  to  be  considered;  and  closely  linked  with  it  was 
the  problem  of  the  amount  of  gold  needed  for  the  pur- 
pose. 

III. — THE  PLAN  OF  EEFORM  PUT  IN  OPERATION. 

To  meet  these  requirements  an  act  was  prepared 
which  was  approved  by  the  National  Assembly  on  March 
20,  1912,  with  the  object  of  bringing  about  stability  of 


exchange,  and  we  are  herein  recommending  additional 
measures  designed  to  give  to  Nicaragua  the  benefits  of 
an  independent  currency  system  secured  by  adequate  re- 
serves of  gold. 

The  monetary  plan  put  in  operation  by  the  Act  of  the 
National  Assembly  of  March  20,  1912,  provides  for  the 
following  steps  in  the  adoption  of  a  definitive  monetary 
system : 

1. — The  standard  unit  of  value  is  fixed  by  Art.  1  of 
the  Act  at  1.672  grams  of  gold,  nine-tenths  fine,  to  be 
called  the  cordoba,  This  unit  is  of  the  same  weight  and 
fineness  as  the  gold  dollar  of  the  United  States. 

2. — Provision  is  made  (Art.  3)  for  a  silver  cordoba, 
containing  25  grams  of  silver,  nine-tenths  fine,  and 
subsidiary  coins  of  silver,  eight-tenths  fine.  Provision 
is  also  made  for  minor  coins  of  nickel  and  copper. 

3. — The  amount  of  the  coinage  (Art.  4)  is  determin- 
able  by  the  National  Bank,  under  regulations  approved 
by  the  Executive.  Provision  is  also  made  for  the  un- 
limited coinage  of  gold  when  it  becomes  practicable  and 
desirable. 

4. — The  paper  currency  will  be  issued  by  the  National 
Bank,  which  has  the  exclusive  right  of  note  issue.  The 
capital  is  only  $100,000,  but  an  early  increase  is  contem- 
plated. 

5. — The  existing  paper  currency  of  the  Bepublie,  rep- 
resenting a  nominal  value  of  about  48,000,000  pesos,  will 
be  received  by  the  National  Bank  in  exchange  for  its 
notes,  expressed  in  the  new  monetary  unit — the  cordoba. 

6. — The  rate  of  exchange  of  the  present  currency 
notes  is  not  finally  fixed  in  the  law,  but  it  is  provided  by 


Article  8  that  an  agreement  on  the  subject  may  be  made 
between  the  National  Bank  and  the  Minister  of  Finance, 
by  which  the  ultimate  rate  of  exchange  shall  be  not  more 
than  1,500  pesos  of  the  old  currency  for  100  cordobas  of 
the  bank-note  issue. 

7. — The  final  rate  of  exchange  will  be  fixed  on  July 
1,  1912 — or  later,  if  the  earlier  date  is  found  imprac- 
ticable— but  (Art.  14)  during  a  period  of  six  months 
thereafter  both  the  old  currency  and  the  new  are  to  be 
legal  tender  at  the  rate  of  exchange  finally  established. 

8. — The  notes  of  the  National  Bank  are  to  be  kept 
(Art.  9)  at  their  face  value  in  gold  cordobas  by  the 
sale  of  gold  drafts  on  New  York  and  on  other  finan- 
cial centres  where  credits  may  be  established  by  the  Na- 
tional Bank  for  the  purpose.  Conversely,  drafts  will 
also  be  sold  in  New  York  and  other  centres  upon  the 
National  Bank  of  Nicaragua. 

9. — The  gold  coin  of  the  Eepublic,  the  silver  cordoba, 
and  the  notes  of  the  National  Bank  are  (Art.  11)  re- 
ceivable for  customs  and  other  public  dues  and  are  legal 
tender  in  the  payment  of  debts  within  the  Republic.  The 
subsidiary  and  minor  coins  will  be  legal  tender  for  an 
amount  not  exceeding  10  cordobas. 

IV. — THE  NEW  UNIT  OF  VALUE. 

The  unit  of  value  adopted  under  the  new  system 
(Articles  1  and  2)  has  been  given  the  name  of  the  cor- 
doba, from  Francisco  Hernandez  de  Cordoba,  the  Span- 
ish founder  of  both  Grenada  and  Leon.  The  new  unit 
is  the  same  in  weight  and  fineness  as  the  gold  dollar  of  the 
United  States  and  was  adopted  with  the  approval  of  the 
President  of  the  Eepublic  and  the  Minister  of  Finance. 


This  adoption  of  a  unit  having  the  same  gold  value 
as  the  gold  dollar  has  the  merit  of  facilitating  financial 
and  trade  relations  between  Nicaragua  and  the  United 
States.  It  reduces  the  problem  of  exchange  with  Amer- 
ica to  a  statement  of  the  rate  charged  for  remittances, 
without  the  confusing  element  of  differences  in  currency 
units,  and  permits  contracts  and  price-lists  to  be  stated 
hi  either  currency  without  the  necessity  of  converting 
one  into  the  other. 

The  alternative  to  the  dollar  unit  which  was  consid- 
ered most  seriously  was  the  adoption  of  a  unit  worth  50 
cents.  This  is  substantially  the  unit  of  Mexico,  the 
Philippine  Islands,  and  the  Eepublic  of  Panama.  In 
Panama,  while  the  local  currency  has  served  as  a  useful 
medium  for  paying  laborers  accustomed  to  the  use  of 
silver,  the  approximate  uniformity  in  size  and  bullion 
value  of  the  Panama  coins  with  those  of  the  United 
States,  having  twice  their  exchange  value,  has  introduced 
a  certain  element  of  confusion  in  the  circulation  of  the 
two  currencies  side  by  side.  It  seemed  advisable,  there- 
fore, in  view  of  the  declared  wishes  of  the  government, 
to  fix  a  unit  identical  in  gold  value  with  that  of  the 
United  States  and  to  provide  for  silver  coins  having  ap- 
proximately the  silver  contents  of  coins  of  the  same  ex- 
change value  in  the  United  States.  The  latter  point  is 
more  fully  discussed  later  on  in  the  section  of  this  re- 
port dealing  with  the  silver  currency. 

V. — HISTORY  OF  THE  PAPER  ISSUES. 

Up  to  1894  the  paper  circulation  of  the  country  was 
furnished  for  several  years  by  the  Bank  of  Nicaragua, 
which  held  a  special  concession*  from,  the  government 
giving  it  the  exclusive  right  of  note  issue.  At  the  above 
date,  the  outstanding  circulation  of  the  Bank  was  about 

*The  concession  ran  for  25  years  from  23rd  March,  1887,  and  has 
therefore  just  expired. 


700,000  pesos,  of  which  the  larger  part  was  issued  in 
1889  and  1890.  When  the  government  determined  to  is- 
sue paper  money,  its  decision  was  taken  exception  to  by 
the  bank  as  being  in  violation  of  its  charter.  The  notes 
of  the  government,  not  being  convertible  into  coin  at  the 
will  of  the  holder,  went  to  a  discount  as  compared  with 
the  notes  of  the  Bank,  which  were  so  convertible.  The 
inevitable  result  followed:  the  inferior  currency  began 
to  oust  the  better. 

For  a  time  a  conflict  continued  between  the  govern- 
ment and  the  bank,  as  to  its  legal  rights  under  the  laws 
of  Nicaragua.  On  September  11,  1897,  the  government 
published  in  the  official  gazette  a  decree  that  no  receiver 
of  public  moneys  should  receive  any  values  except  gold 
or  silver  coin  or  Treasury  notes  except  with  a  rebate  of 
10  per  cent.,  and  imposed  a  penalty  upon  any  official  who 
disobeyed  the  rule.  These  provisions  were  contended  by 
the  bank  to  be  in  direct  contravention  of  its  privileges. 
They  naturally  impaired  the  value  of  the  bank's  notes 
and  led  to  their  gradual  elimination.  The  Bank,  after 
considerable  correspondence,  closed  its  sub-agencies  at 
Granada  and  Leon,  and  began  calling  in  its  notes.  Its 
circulation,  which  a  week  before  the  decree  had  been 
615,000  pesos,  fell  by  the  close  of  the  year  1897  to  320?000 
pesos,  by  the  close  of  1898  to  82,000  pesos,  and  has  since 
gradually  been  reduced  to  a  merely  nominal  amount. 

The  standard  of  the  country  prior  to  these  issues  had 
been  silver,  but  foreign  exchange  was  quoted  in  gold,  so 
that  with  the  silver  dollar  at  50  cents,  foreign  exchange 
would  be  quoted  at  200  and  at  a  later  date,  with  the  silver 
dollar  at  about  40  cents  gold,  would  be  at  250.  This 
rate  of  250  may,  therefore,  be  treated  in  a  sense  as  the 
legitimate  exchange,  due  to  the  difference  in  value  be- 
tween gold  and  silver  at  the  coinage  ratio,  and  so  long  as 


it  was  maintained  did  not  connote  depreciation  of  the 
notes  in  silver. 

While  the  notes  of  the  government  showed  a  tendency 
from  the  first  to  depreciate  below  their  nominal  value 
in  silver,  this  did  not  become  marked  for  several  years. 
The  following  table  shows  the  amount  of  notes  issued 
and  retired  during  each  year  from  the  first  issues  to  the 
close  of  1909,  with  the  amount  outstanding  at  the  end 
of  each  year  and  the  average  rate  of  exchange  during  the 
year,  so  far  as  the  data  were  available: 

ISSUES  OF  PAPER  MONEY 
(in  pesos) 


Year. 

1894-5* 
1895-6* 

New  Issues 

$271,650 

221,875 

Incinerations 

$         25 

Net  Outstanding 
Dec.  31 
$271,625 

493,500 

Average 
rate  of 
Exchange 

1897 

500,268 

993,768 

1898 
1899 
1900 

1,521,000 
376,355 

658,882 

135,126 
64,693 
50,251 

2,379,642 
2,691,304 
3,299,935 



1901 
1902 
1903 

2,200,624 
3,000,000 

144,737 
49,587 
224,170 

5,355,822 
8,306,235 
8,082,065 

372.0 
528.0 
720.0 

1904 
1905 

;  

150,000 
130,000 

7,931,905 
7,801,905 

684.0 
616.0 

1906 
1907 
1908 
1909 
1910 

235,000 
1,015,000 
1,850,000 
1,499,950 
19,625,000 

140,000 
46,751 
44,000 
22,000 
822,000 

7,896,905 
8,865.154 
10,671,153 
12,149,103 
30,952,103 

540.0 
630.0 
797.0 
913.0 
f 

1911 

24,470,000 

6,865,000 

48,557,103 

t 

These  figures  show  that  very  moderate  use  was  made 
of  the  power  of  note  issue  during  the  first  few  years  of 


*To  October  12. 

fNo  annual  average  is  given  for  these  years,  as  the  continuous  large 
issues  would  necessarily  vitiate  any  conclusions  drawn  from  it. 


8 

its  exercise.  Down  to  the  close  of  the  year  1897  the 
emissions  exceeded  by  only  a  small  amount  the  sup- 
pressed issues  of  the  Bank  of  Nicaragua,  and  even  when 
they  were  advanced  to  several  million  pesos,  they  prob- 
ably only  replaced  the  silver  currency  which  flitted  across 
the  frontier  after  it  reached  a  premium  in  paper.  The 
easy  road  of  irredeemable  paper  issues  having  been  once 
taken,  it  proved  a  more  and  more  attractive  means  of 
overcoming  the  deficits  arising  from  inadequate  taxation, 
defective  administration,  and  the  cost  of  putting  down 
repeated  uprisings  against  the  government  of  President 
Zelaya,  During  the  three  years  ending  in  1902  the  cir- 
culation increased  three-fold  and  the  gold  exchange  rose 
to  595,  showing  a  depreciation  in  the  paper  money  of 
nearly  50  per  cent,  in  the  last  year. 

The  period  from  1903  to  1906  seems  to  have  been  one 
in  which  the  government  realized  that  the  power  to  issue 
paper  had  been  abused,  and  that  if  the  public  credit  was 
not  to  be  gravely  impaired,  other  means  must  be  found 
for  raising  revenue.  For  four  years  only  235,000  pesos 
were  issued  in  new  notes,  the  amount  cancelled  was  much 
larger,  and  the  rate  of  exchange  fell  from  700  at  the 
close  of  1903  to  520  at  the  close  of  1906. 

During  the  next  two  years,  owing  probably  to  the 
necessity  of  finding  funds  to  meet  the  expenditure  caused 
by  a  series  of  uprisings  against  the  tyranny  of  President 
Zelaya,  there  was  a  net  emission  of  two  and  three-quar- 
ters millions  of  notes  which,  with  the  instability  of  politi- 
cal conditions  and  the  arrest  to  trade  caused  by  war, 
drove  the  premium  on  gold  rapidly  upwards.  From  this 
time,  as  the  revolutionary  movement  gathered  strength, 
ending  ultimately  in  the  retirement  of  Zelaya  and  the 
accession  to  power  of  the  present  administration,  a  regu- 
lar carnival  of  inflation  set  in.  Large  orders  were  placed 
with  the  American  Bank  Note  Company  for  notes,  but 


the  supplies  not  coming  in  fast  enough  to  fill  a  depleted 
treasury,  contracts  were  given  to  two  private  firms  in 
Managua  to  supply  seven  millions  more.  Of  these  latter 
notes  1,450,000  pesos  were  emitted  before  Zelaya's  fall 
in  December,  1909,  and  the  remainder  during  the  admin- 
istration of  Madriz. 

A  portion  of  these  notes,  aggregating  about  450,000 
pesos,  were  stolen  after  their  delivery  by  the  contractors 
and  before  they  reached  the  office  of  record.  They  are, 
therefore,  not  registered  amongst  the  acknowledged  emis- 
sions, and  have  been  added  by  us  to  the  circulation  as 
officially  declared. 

In  March  or  April,  1911,  a  decree  was  issued  acknowl- 
edging the  issue  of  fifteen  millions  of  paper  money,  which 
were  supplied  by  the  American  Bank  Note  Company  of 
New  York,  and  in  the  autumn  a  supply  of  a  further  ten 
millions  was  clandestinely  ordered  and  put  into  circula- 
tion (with  the  exception  of  about  800,000  pesos,  which, 
not  having  been  issued  when  Don  Pedro  Cuadra  became 
Minister  of  Finance,  have  been  retained  under  his 
orders). 

The  government  quite  properly  used  part  of  the  notes 
supplied  by  the  American  Bank  Note  Company  to  recall 
and  incinerate  the  provisional  notes  printed  locally,  and 
those  of  the  older  notes  which  came  into  the  public 
treasury  in  such  a  dirty  and  dilapidated  condition  as  to 
preclude  their  being  put  back  into  circulation.  As  the 
faculty  of  legal  tender  was  withdrawn,  after  suitable  no- 
tice, from  the  provisional  notes,  it  is  practically  certain 
that  they  no  longer  survive  in  any  quantity,  and  the  fig- 
ures of  the  incinerations  show  this  clearly. 

On  the  following  page  a  table  appears,  summing  up 
the  details  heretofore  given : 


10 

SUMMAEY  OF  THE  CIRCULATION  OF  NATIONAL  CURRENCY, 
DECEMBER  18,  1911. 

Pesos. 

Circulation  on  December  31,  1909,  accord- 
ing to  the  accounts  of  the  Treasurer  Gen- 
eral, and  the  differences  between  the 
issues  and  the  incinerations  under  the 
Government  of  Zelaya 12,171,103.95 

Issues  ordered  by  President  Madriz: 

In  provisional  notes  4,450,000 

In  notes  printed  abroad 9,415,000 

Ordered  by  Dr.  Madriz,  but  is- 
sued later 5,585,000 


Total  19,550,000.00 

Issues   ordered  by   the   present 

Government  25,000,000 

Unissued  and  in  hand 830,000 

24,170,000.00 


55,891,103.95 
Incinerations: 


During  the  Government   of  Dr. 

Madriz  433,500 

During  the  present  Government 

to  the  close  of  October,  1911 5,500,000 

From  November  1st  to  date 1,650,000 


Total  7,583,500.00 

Net  circulation  48,307,603.95 

Amount  of  provisional   notes 

stolen , 450,000.00 

48,757,603.95 


11 

The  total  shown  by  this  table  does  not  correspond 
exactly  with  other  figures  furnished  us  by  the  Govern- 
ment of  Nicaragua  (as  can  be  seen,  for  example,  by  re- 
ferring to  the  closing  figures  on  page  7).  The  differ- 
ences, however,  are  small,  and  are  apparently  due  to  slight 
errors  or  omissions  of  transcription  in  extracting  from 
the  official  records  the  entries  of  new  issues  and  can- 
cellations. There  were  various  rumors  afloat  at  the  time 
of  our  visit  to  Nicaragua,  to  the  effect  that  there  had  been 
issues  of  Treasury  notes  which  had  been  made  surrep- 
titiously, both  under  President  Zelaya  and  one  of  his 
successors,  and  that  issues  declared  to  have  been  with- 
drawn had  in  fact  been  reissued  or  stolen  in  some  of  the 
processes  of  withdrawal  and  cancellation.  In  order  to 
resolve  doubts  upon  this  subject  we  obtained  from  the 
Treasury  books  the  authorizations  for  new  issues  from 
the  close  of  1905  to  the  last  issue  on  October  24th,  1911, 
and  a  similar  list  of  cancellations  and  incinerations.  We 
personally  examined  and  verified  some  of  these  entries. 
While  these  records  were  mingled  with  other  records  of 
the  Treasury,  they  appeared  to  be  made  in  good  faith 
at  the  times  shown  by  the  dates,  and  each  incineration 
was  shown  to  have  been  witnessed  and  attested  by  two 
reputable  merchants,  several  of  whom  appeared  before 
us  and  gave  evidence.  The  rumors  above  referred  to 
probably  relate  to  the  provisional  notes,  printed  by  local 
printers,  and  to  the  surreptitious  issue  of  10,000,000 
pesos,  made  in  the  autumn  of  1911,  for  which  there  was 
no  official  decree,  but  which  was  duly  recorded  on  the 
books. 

The  books  of  the  Comptroller  of  Accounts  are  in  much 
better  condition  than  was  indicated  by  popular  rumor; 
and  upon  a  review  of  all  the  evidence,  including  an  ex- 
amination of  the  printers  who  prepared  the  provisional 
notes,  we  are  satisfied  that  the  official  figures  of  the  Gov- 


12 

eminent    are   correct    in    substance,    if   not    absolutely 
exact. 

These  figures  make  no  allowance  for  loss  and  destruc- 
tion— two  causes  which  count  largely  in  tropical  coun- 
tries and  in  a  community  where  currency  is  largely 
hoarded  in  private  repositories,  instead  of  being  depos- 
ited in  banks.  Especially  must  this  be  the  case  in  regard 
to  notes  for  50  centavos,  which  have  depreciated  to  a 
value  of  about  three  cents  in  United  States  gold;  the 
defaced  and  foul  condition  of  many  of  these  naturally 
leads  to  carelessness  in  guarding  them,  or  even  maybe 
to  their  destruction,  when  their  condition  is  particularly 
bad. 

VI. — FLUCTUATIONS  IN  THE  PAPER  EXCHANGE. 

It  will  be  noticed  that  for  the  last  two  years  (1910 
and  1911)  no  figures  have  been  given  in  the  table  for 
the  average  rate  of  exchange.  During  these  years  of 
inflated  and  irregular  issues  and  revolutionary  disturb- 
ances, no  instructive  average  can  be  struck,  and  the  facts 
require  separate  treatment.  With  this  exception  the  fluc- 
tuation in  the  exchanges  verifies  in  an  interesting  manner 
several  of  the  principles  of  money — primarily  demon- 
strating that  a  country  will  absorb  only  so  much  cur- 
rency as  it  has  need  for  at  a  given  gold  valuation.  This 
is  shown  by  the  fact  that  the  increase  in  the  issue  of 
paper  was  accompanied  in  Nicaragua  by  an  almost  cor- 
responding fall  in  the  gold  value  of  the  unit,  leaving  the 
gold  value  of  the  total  circulation  substantially  unaltered. 
The  following  table,  illustrating  this,  gives  the  selling 
rate  for  American  gold  in  Nicaraguan  paper  for  the  nine 
years  ending  with  1909: 


13 

MONTHLY  BATES  FOK  EXCHANGE  ON  NEW  YORK. 


1901 

1902 

1903 

1904 

1905 

January 

295 

395 

730 

710 

640 

February 

300 

400 

800 

720 

640 

March 

305 

410 

720 

730 

646 

April 

320 

395 

725 

660 

655 

May 

400 

415 

700 

690 

625 

June 

400 

440 

685 

650 

605 

July 

400 

615 

720 

660 

570 

August 

405 

610 

720 

720 

574 

September 

410 

615 

720 

690 

610 

October 

425 

615 

720 

670 

590 

November 

405 

830 

705 

670 

610 

December 

400 

595 

700 

645 

628 

Average 

372' 

528 

720 

684 

616 

Month 

1906 

1907 

1908 

1909 

1910 

January 

600 

510 

710 

850 

960 

February 

580 

535 

750 

900 

960 

March 

565 

540 

770 

960 

1,000 

April 

550 

545 

765 

1,050 

1,020 

May 

520 

600 

775 

800 

1,075 

June 

510 

550 

830 

830 

1,080 

July 

525 

650 

810 

870 

1,200 

August 

540 

700 

790 

900 

1,400 

September 

520 

680 

780 

945 

1,300 

October 

520 

680 

810 

900 

1,350 

November 

530 

690 

900 

975 

1,250 

December 

520 

700 

875 

975 

1,200 

Average*     540          630          797          913 

The  effect  of  the  infusion  of  new  paper  upon  the  gold 
value  of  the  total  circulation  appears  in  the  following 
table: 

*The  average  is  omitted  for  1910,  because  the  great  variations  in  the 
quantities  of  paper  in  circulation  would  make  an  average  of  no  value. 


14 

GOLD  VALUE  OF  PAPER  CURRENCY  AT  END  OF  EACH  YEAR. 

Kate  of  Gold 

Dec.  31 :    Circulation :  Exchange :  Values : 
(in  pesos)              (U.  S.  Dollars) 

1901  5,355,822  400  1,338,900. 

1902  8,306,235  595  1,396,000. 

1903  8,082,065  700  1,154,500. 

1904  7,931,905  645  1,229,700. 

1905  7,801,905  628  1,242,300. 

1906  7,896,905  520  1,518,600. 

1907  8,865,154  700  1,266,400. 

1908  10,671,153       875        1,219,500. 

1909  12,149,103       975        1,256,300. 

The  figures  just  given  are  restricted  to  a  narrow  mar- 
ket and  represent  exchange  at  the  end  of  each  month, 
rather  than  an  average  of  all  sales  or  even  of  daily  quo- 
tations. They  are  not,  therefore,  an  absolutely  exact  re- 
flection of  the  movement  of  exchange,  but  are  sufficiently 
accurate  for  purposes  of  discussion.  It  appears  that  at 
the  close  of  the  year  1901,  when  the  paper  circulation  was 
only  5,355,822  pesos,  exchange  was  only  400  and  had  been 
during  the  year  considerably  lower.  The  injection  of 
nearly  3,000,000  pesos  into  the  circulation  during  1902 
carried  exchange  to  an  average  during  the  next  year  of 
720.  Moderation  in  further  issues  of  notes  during  the 
four  years  ending  with  1906  kept  the  net  circulation 
comparatively  unaltered  in  amount  and  brought  down 
exchange  at  the  close  of  1906  to  520.  From  1907  onward, 
occurred  large  additions  to  the  paper  circulation  and  a 
sharp  rise  of  exchange,  which  at  the  close  of  1909  went 
to  975,  the  average  for  the  year  having  been  913. 

Ordinarily  speaking,  an  increase  of  a  note  issue  is 
made  in  response  to  a  legitimate  expansion  of  business, 
and  when  this  takes  place,  the  gold  value  of  the  total 


15 

circulation  moves  naturally  upward  with  the  increase  of 
.  the  issue.  Where,  however,  the  note  issue  is  used  as  a 
source  of  revenue,  the  increase  occurs  not  when  the  need 
of  business  requires  it,  but  when  the  treasury  is  empty. 
It  is  clear,  therefore,  that  the  gold  value,  far  from  rising 
equivalently,  may  even  fall.  The  years  1903,  1907,  1908 
and  1909  were  years  of  revolutionary  disturbance. 

Turning  now  to  the  years  left  hitherto  out  of  con- 
sideration— the  years  1910  and  1911 — the  increase  in 
the  volume  of  the  note  circulation  from  12,149,103 
pesos,  to  nearly  31  millions  in  1910,  and  48%  millions 
in  1911,  was  immediately  accompanied  by  a  great  rise  in 
the  premium  on  gold,  which  ranged,  with  violent  fluctua- 
tions, between  900  and  2,100.  A  priori,  one  would  have 
expected  that  the  emission  of  1910,  which  had  raised 
the  circulation  to  two  and  a  half  times  what  it  was  in 
1909,  would  have  had  a  greater  effect  upon  the  premium 
on  gold  than  a  rise  from  975  to  1,200.  There  is  little 
doubt  but  that  this  rise  would  have  been  greater  had 
it  not  been  that  the  market  expected  great  things  from 
the  effects  of  peace  upon  trade,  and  from  the  support 
given  by  America  to  the  restoration  of  stable  conditions. 
In  1911,  the  addition  to  the  note  circulation  was  of  about 
the  same  amount  as  in  1910,  but  the  effect  upon  the  pre- 
mium on  gold  was  far  greater.  The  causes  for  this  are 
also  not  far  to  seek.  Hope  deferred  had  made  the  heart 
sick,  and — what  has  been  perhaps  even  a  more  effective 
factor — the  truth  that  when  once  the  money  of  a  country 
is  redundant  to  a  point  of  extreme  saturation;  any  addi- 
tion to  an  overload  of  money  has  an  effect  somewhat 
disproportionate  to  its  actual  amount.  It  is  impossible 
to-day,  in  the  presence  of  so  many  disturbing  elements, 
to  know  what  would  be  the  true  exchange  to-day  if  all 
the  notes  issued  were  in  circulation.  Expressing  it  in 
terms  of  the  premium  upon  gold,  a  conservative  estimate 
would  perhaps  be  2,000. 


16 

VII. — EXISTING  METHODS  OF  DEALING  IN  EXCHANGE. 

The  rate  of  exchange  for  Nicaraguan  currency  is  de- 
termined by  the  rates  obtainable  for  drafts  on  New  York. 
These  are  also  sold  upon  London,  Paris,  Hamburg  and 
other  points,  but  the  American  gold  dollar  is  the  basis 
of  the  quotations.  An  exchange  of  1,700  means  that  the 
cost  of  $1  in  gold  is  17  pesos  in  Nicaraguan  currency. 
So  wide  have  been  the  fluctuations  in  the  exchanges  that 
the  small  commission  which  would  be  chargeable  for 
drafts  has  been  practically  engulfed  in  the  difference  be- 
tween buying  and  selling  rates.  Fifty  points  has  been 
the  usual  difference,  which  means  about  2y2%  when  ex- 
change is  2,000.  So  rapid  are  the  fluctuations,  however, 
that  the  bankers  are  not  always  able  to  balance  their 
transactions,  and  it  was  stated  by  one  of  them  that  their 
average  profits  upon  exchange  operations  were  not  sub- 
stantially in  excess  of  one  per  cent. 

The  sales  of  gold  drafts  are  made  partly  by  two  bank- 
ing institutions — the  Commercial  Bank  of  Spanish  Amer- 
ica, Limited  (which  is  a  successor,  in  a  sense,  of  the  old 
Bank  of  Nicaragua,  the  London  Bank  of  Central  America, 
and  the  Cortes  Commercial  and  Banking  Company)  and 
the  Banco  Comercial  de  Nicaragua,  Limited — a  com- 
paratively new  institution,  but  which,  being  partly  owned 
and  wholly  managed  by  the  former  agent  of  the  Cortes, 
does  the  major  part  of  the  banking  business  of  the  coun- 
try. While,  however,  these  two  institutions  do  a  consid- 
erable business  in  the  purchase  and  sale  of  foreign  drafts, 
they  do  not  by  any  means  do  all  of  the  business  of  this 
character  which  is  done  in  Nicaragua. 

Several  importers  and  exporters,  whose  names  are 
well  known  and  whose  credit  is  established  at  American 
and  European  commercial  centres,  do  their  own  banking 
and  meet  a  considerable  part  of  the  demand  for  gold 


17 

drafts.  Banking  is  done  to  a  considerable  extent  on  the 
East  Coast  by  the  United  Fruit  Company,  the  Atlantic 
Fruit  Company,  Belanger's  Limited,  and  a  few  other 
firms  engaged  in  importing  goods  for  Nicaraguan  con- 
sumption and  exporting  the  products  of  the  country  on 
that  coast. 

The  foreign  drafts  which  are  available  to  meet  obli- 
gations abroad  are  derived  largely  from  the  exporta- 
tion of  coffee.  Some  drafts  arise  also  from  exports  of 
gold  mined  in  Nicaragua,  sugar,  rubber,  hard  woods,  and 
bananas;  but  in  the  case  of  bananas  the  banking  opera- 
tions required  are  performed  chiefly  by  the  two  large 
fruit  companies  on  the  Atlantic  Coast.  The  exportation 
of  the  coffee  crop  takes  place  chiefly  from  December  to 
March,  but  actual  shipment  is  anticipated  to  a  consider- 
able extent  by  drafts  drawn  by  the  growers  upon  their 
European  correspondents  as  early  as  September.  Coffee 
exporters  are  permitted  at  that  time  to  draw  to  a  cer- 
tain percentage  of  the  value  of  the  coffee  which  is  in 
sight  for  exportation,  and  to  draw  additional  percentages 
at  later  dates,  until  the  shipments  are  completed  and  paid 
for  in  February  or  March.  It  is  at  this  time  that  im- 
porters are  enabled  most  easily  to  obtain  exchange  to 
pay  for  the  manufactured  goods,  food  supplies  and  other 
articles  which  they  bring  in  from  time  to  time  during  the 
year.  In  the  case  of  the  banks,  the  coffee  bills  which 
are  purchased  are  used  to  cover  the  bills  sold  to  im- 
porters, which  can  thus  be  obtained  in  such  amounts  as 
are  desired.  In  the  case  of  private  firms,  having  well- 
established  credits  in  London,  Hamburg,  New  York,  and 
elsewhere,  as  shippers  of  coffee  and  other  articles,  it  is 
the  custom  to  split  up  the  amounts  which  might  be  drawn 
against  outward  shipments  into  amounts  suitable  to  the 
needs  of  importers  in  making  their  remittances.  In  many 
cases,  however,  the  claim  against  the  importer  takes 


18 

the  form  of  a  draft  upon  him  by  the  European  exporter, 
which  he  may  meet  either  by  the  purchase  of  a  coffee  bill 
or  by  payment  in  currency  to  his  banker,  who  promptly 
turns  the  currency  into  a  gold  draft  for  remittance  to 
his  European  client. 

The  credit  relations  of  Nicaraguan  houses  with  foreign 
exporters  are  such  that  prompt  payment  of  such  drafts 
is  not  always  insisted  upon.  Payments  are  usually  made 
upon  account  and  not  for  the  whole  of  the  balance  against 
the  Nicaraguan  importer,  and  are  made  promptly  or  de- 
layed, according  to  the  resources  derived  by  the  importer 
from  his  sales  to  retailers  and  collections  from  them. 
The  wide  fluctuations  in  recent  years  in  the  quotations 
for  exchange  have  led  to  great  caution  on  the  part  of 
importers  in  Nicaragua  in  extending  credit  to  retailers 
in  the  interior.  Indeed,  it  was  stated  by  several  witnesses 
that  such  credits  had  been  practically  cut  off  and  that 
goods  sold  were  required  to  be  paid  for  at  once,  in  cash. 
By  thus  obtaining  paper  currency  at  the  time  of  sale,  it 
could  be  employed  for  disbursements  or  converted  into 
gold  at  the  rate  of  the  day,  while  if  credit  were  extended 
for  any  considerable  term  it  would  often  result  in  the 
payment  of  an  agreed  amount  in  paper,  which  would 
have  greatly  fallen  in  gold  value  by  the  date  of  pay- 
ment. 

The  violent  fluctuations  in  exchange  have  led  the  more 
conservative  dealers  in  it  to  endeavor  to  balance  their 
operations  in  buying  and  selling,  instead  of  assuming  the 
risk  of  selling  more  exchange  than  is  bought,  or  buying 
more  than  they  see  their  way  clear  to  sell.  The  result 
of  this  policy  of  caution  has  been  to  leave  the  market 
without  a  supply  of  bills  for  sale  when  the  volume  of 
exports  and  the  corresponding  supply  of  drafts  on 
American  and  European  centres  has  been  small.  During 
the  period  of  our  stay  in  Nicaragua  it  was  declared  by 


19 

several  bankers  that  there  were  very  few  drafts  for 
sale,  and  that  they  were,  therefore,  unable  to  meet  the 
demand  for  exchange  at  the  price  in  paper  currency 
which  buyers  were  disposed  to  pay.  The  effect  of  this 
was  a  hardening  of  the  rates  of  exchange  in  paper  cur- 
rency, with  the  result  that  persons  having  obligations  to 
meet  refrained  as  long  as  possible  from  entering  the 
market  as  buyers  of  exchange,  in  the  hope  that  the  mone- 
tary reform  or  other  influences  would  cause  a  decline  in 
rates.  Obviously  this  policy  of  keeping  out  of  the  mar- 
ket could  not  be  continued  indefinitely,  as  obligations 
matured  or  became  pressing,  and  ultimately  such  clients 
of  the  banks  might  be  compelled  to  pay  even  higher  rates 
than  if  they  had  not  delayed  their  purchases.  This  dan- 
ger was  especially  feared  at  the  time  of  our  visit,  in 
view  of  the  uncertainty  which  prevailed  as  to  the  rate  of 
exchange  which  might  ultimately  be  fixed  and  the  doubt 
whether  the  resources  of  the  government  would  enable 
it  to  be  fixed  within  a  reasonable  time.  The  fear  was 
expressed  that,  if  no  action  was  taken  before  our  de- 
parture for  New  York,  something  resembling  a  panic  in 
exchange  would  result  from  the  scramble  to  meet  neces- 
sary obligations  abroad  and  the  renewed  depreciation 
which  would  ensue  in  the  gold  value  of  the  local  currency. 
The  market  for  exchange  in  Nicaragua  is  a  restricted 
one,  and  is  easily  influenced  by  offerings  of  small 
amounts.  The  credits  of  Nicaraguan  bankers  abroad  are 
apparently  not  large,  and  they  have  refrained  recently, 
as  above  pointed  out,  from  speculative  sales  of  bills 
which  could  not  be  promptly  covered  by  remittances. 
Importers  in  Nicaragua  usually  do  business  on  six  and 
nine  months '  credits.  Twice  during  1911  they  speculated 
for  a  fall  in  the  premium  on  gold;  on  the  first  occasion, 
when  the  loan  negotiations  were  progressing  favorably, 
and  again  when  our  advent  was  expected  in  October. 


20 

That  is  to  say,  they  postponed  their  gold  liabilities  and 
deposited  paper  currency  in  the  banks.  The  public,  to 
some  extent,  followed  them,  particularly  those  who  had 
received  large  payments  in  paper  as  compensation  for 
war  damages  or  in  liquidation  of  military  exactions.  It 
was,  of  course,  well  known  that  the  government  was  at 
the  time  putting  in  circulation  large  additional  amounts 
of  paper  currency,  but  the  influence  of  this  fact  upon  the 
value  of  the  currency  was  either  not  generally  under- 
stood or  was  considered  to  be  offset  by  the  probability 
of  its  early  conversion.  These  speculations  were,  of 
course,  disastrous,  and  the  banks  exacted  additional  mar- 
gins of  national  currency  or  required  the  speculator  to 
close  his  account  by  buying  exchange  to  cover.  Nearly 
all  such  accounts  were  closed  at  considerable  loss,  with 
such  crippling  and  discouraging  results  that  when  ex- 
change touched  its  maximum  points  between  1800  and 
2150,  speculative  sales  of  foreign  drafts  for  the  decline 
were  small.  In  these  circumstances  the  paper  currency 
now  held  by  the  bankers  and  the  public  in  Managua,  in 
anticipation  of  a  rise,  has  been  estimated  by  a  leading 
banker  to  be  not  more  than  2y2  millions  of  pesos,  repre- 
senting, at  1600,  about  $150,000  in  gold.  So  narrow  is 
the  local  market  ordinarily  that  it  was  stated  by  another 
banker  that  he  could  produce  a  fall  of  exchange  of  sev- 
eral hundred  points  if  he  had  the  means  of  selling  foreign 
drafts  to  the  amount  of  $50,000,  and  that  he  could  produce 
a  very  sensible  effect  if  he  was  able  to  offer  drafts  to  the 
amount  of  $5,000  gold. 

VIII. — THE  AMOUNT  OF  CURRENCY  A  COUNTRY  NEEDS. 

At  the  outset,  when  conversion  of  a  currency  is  deter- 
mined upon,  one  of  the  first  questions  for  ascertainment 
is  the  quantity  of  new  currency  which  will  be  required  to 
replace  the  old. 


21 

The  amount  of  currency  which  a  country  has  to  sus- 
tain at  any  given  parity  depends  upon  a  consideration 
of  the  quantity  of  commodities  on  sale  and  the  number 
of  times  they  change  hands,  as  against  the  amount  of 
currency  in  circulation  and  the  number  of  times  it 
changes  hands.  As  in  modern  times  countries  are  not 
isolated  and  trading  between  them  is  practically  continu- 
ous, it  follows  that  the  same  factors  interact,  and  each 
country  materially  affects  and  is  affected  by  the  condi- 
tions existing  in  the  other. 

Between  two  gold  countries  there  cannot  be  wide 
variations  in  the  prices  of  staple  commodities,  except  so 
far  as  prices  are  influenced  by  artificial  barriers  or  dif- 
ferences of  local  conditions,  such  as  tariff  rates  or  the 
cost  of  transportation.  Other  things  being  equal,  there 
will  be  a  constant  tendency  towards  the  restoration  of 
equilibrium  of  gold  prices  in  different  countries.  If  ele- 
ments of  friction  are  excluded  from  consideration,  goods 
will  move  from  the  market  where  they  are  cheaper  to 
the  market  where  they  are  dearer,  and  gold  will  move  in 
the  opposite  direction — that  is,  it  will  flow  into  the  coun- 
try where  goods  are  low  in  price,  and  away  from  the 
country  where  goods  are  high  in  price.  Hence,  exists  a 
tendency  towards  equilibrium  in  the  distribution  of  gold, 
which  practically  fixes  the  amount  of  gold  or  its  equiva- 
lent in  other  forms  of  currency  which  is  required  in  each 
country.  If,  therefore,  there  is  an  issue  of  paper  cur- 
rency, which  is  not  called  into  existence  and  sustained  by 
a  genuine  demand,  it  follows  that  it  will  depreciate  by 
the  amount  by  which  it  has  exceeded  the  requirements  of 
the  country  when  valued  in  gold. 

Thus,  in  Brazil,  which  issued  irredeemable  paper  in  a 
very  guarded  manner  prior  to  the  abolition  of  the  empire 
in  1889,  but  which  entered  upon  issues  enormously  in 
excess  of  previous  requirements  soon  after  the  proclama- 


22 

tion  of  the  republic,  it  was  found  that  the  average  decline 
of  the  gold  value  of  the  paper,  expressed  in  rates  of  ex- 
change on  London,  more  than  kept  pace  with  the  increase 
in  the  quantity  of  paper.  The  paper  circulation,  which 
stood  at  297,800,000  milreis  in  1890,  was  worth  more  in 
gold  than  the  amount  of  788,364,000  milreis  which  was  in 
circulation  in  1898. 

From  these  considerations,  it  is  clear  that  the  new 
currency  should  at  commencement  be  limited  to  the 
amount  which,  at  the  rate  of  exchange  selected,  will  equal 
the  gold  value  of  the  currency  withdrawn.* 

IX. — DETERMINATION  OF  THE  BATE  OF  EXCHANGE. 

In  selecting  a  rate  of  exchange  for  adoption,  the 
proverbial  three  courses  are  open: 

1. — Suspension  of  further  issues  so  as  to  appre- 
ciate the  existing  currency  by  scarcity; 

2. — Conversion  at  the  rate  of  the  day; 

3. — Retirement  of  a  portion  of  the  currency  so 
as  to  admit  of  the  remainder  being  converted  at  a 
higher  par. 

Of  these  methods,  British  India  adopted  the  first ;  and 
it  took  her  five  years  to  raise  the  rate  of  the  rupee  from 
13%  to  16  pence. 

In  Austria-Hungary,  the  monetary  reform  of  1892 
adopted,  in  substance,  the  rate  of  exchange  of  the  day, 
which  reduced  the  old  nominal  value  of  the  paper  in  gold 
about  16  per  cent.  In  Russia,  the  reform  of  1895  adopted 
a  rate  of  exchange  which  was  one-third  below  the  face 
value  of  the  old  circulation  in  paper,  but  represented  sub- 
stantially the  average  rate  of  exchange  of  several  pre- 

*Figures  bearing  on  this  matter  will  be  found  on  page  31. 


23 

ceding  years.  In  the  Philippine  Islands  the  adoption  of 
a  silver  unit  having  a  fixed  value  of  50  cents  in  United 
States  gold,  represented  an  enhancement  of  the  gold  value 
of  the  standard  coin  by  about  20  per  cent. ;  but  this  de- 
parture from  the  exchange  of  the  day  was  less  serious 
than  might  appear  upon  its  face,  since  the  value  of  silver 
had  been  fluctuating  widely  and  had  within  two  years 
been  substantially  at  the  parity  adopted  by  the  law  of 
1903.  In  Mexico  the  adoption  of  a  similar  unit,  repre- 
senting approximately  50  cents  United  States  currency, 
was  based  upon  the  average  exchange  of  the  preceding 
decade. 

Broadly  speaking,  it  is  now  recognized  that  in  the 
absence  of  special  causes,  the  course  of  adopting  the  rate 
of  the  day  should  be  normally  taken.  It  leaves  things 
as  they  are  and  so  does  not  affect  contracts,  prices  or 
wages.  Sometimes,  however,  as  in  India,  the  decision 
is  influenced  by  the  Government's  gold  liabilities.  In 
some  other  cases  it  has  been  thought  fit  to  take  a  rate, 
based  on  an  average  of  preceding  years.  It  is,  in  fact, 
only  now  becoming  gradually  understood  that  the  adop- 
tion of  any  rate  which  is  materially  higher  than  that 
prevailing  is  unpopular  in  business  and  banking  circles ; 
for  enhanced  exchange  is  reached  by  restriction,  and 
restriction  means  falling  prices  and  a  tight  money  mar- 
ket until  the  new  equilibrium  is  attained. 

X. — SEASONS  FOR  BECOMMENDING  THE  BATE  OF  1250. 

There  are  special  reasons,  both  political  and  economic, 
which  justify  the  rate  we  suggest. 

1. — The  recent  date  of  the  great  decline  in  the  gold 
value  of  the  existing  paper  money. 

In  the  last  ten  years,  as  has  already  been  pointed  out, 
the  emissions  have  quadrupled;  and  the  effect  has  been 


24 

to  congest  the  vaults  of  banks  and  the  holdings  of  private 
individuals.  Business  has  not,  and  cannot  have,  had  the 
time  to  adjust  itself  to  the  altered  conditions. 

2. — Wages  and  prices  are  not  yet  adjusted  to  the  pres- 
ent high  exchange.  This  is  a  natural  consequence  of  the 
extremely  recent  date  of  the  fall  in  the  gold  value  of 
paper.  It  is  a  well-established  economic  principle,  that 
while  prices  and  wages  will  tend  to  rise  as  the  currency 
depreciates,  the  rise  of  both  lags  behind  the  depreciation. 
It  is  easier,  in  most  cases,  for  the  merchant  to  adjust 
his  prices  to  the  new  conditions  than  for  the  laborer  to 
secure  an  advance  in  his  wages;  but  even  the  merchant 
does  not  find  the  process  of  advancing  prices  one  with- 
out friction  and  delays.  This  is  especially  true  in  regard 
to  prices  of  articles  and  services  having  a  conventional 
value,  such  as  charges  for  newspapers,  beverages  at  re- 
tail, hotel  charges,  and  prices  for  popular  articles  of 
consumption  long  established  at  a  fixed  price.  It  is  an 
inevitable  conclusion  of  common  sense,  as  well  as  of  ob- 
servation, that  where  the  gold  value  of  paper  is  falling 
from  day  to  day  or  week  to  week,  the  retailer,  even  in 
the  absence  of  strong  popular  resistance,  finds  it  difficult 
to  advance  prices  rapidly  enough  to  meet  the  new  condi- 
tions, and  either  lags  behind  the  unfavorable  exchange 
in  making  such  advances  or  makes  them  in  wider  jerks. 

In  the  case  of  the  paper  currency  of  Nicaragua,  there 
had  been,  up  to  the  close  of  the  year  1909,  a  gradual  rise 
of  paper  prices  which  had  in  a  rough  way  corresponded 
to  the  rise  in  exchange.  To  some  degree,  also — and  to  a 
rather  remarkable  degree,  according  to  some  of  the  tes- 
timony submitted  to  us — wages  had  also  been  advancing 
to  meet  the  declining  value  of  the  paper;  but  such  ad- 
vances, even  where  they  were  adequate,  were  usually 
made  several  months  later.  By  the  beginning  of  the  year 


25 

1911,  it  might  perhaps  be  said  that  prices  and  wages  had 
again  been  adjusted  approximately  to  the  rise  in  ex- 
change, which  stood  at  about  1,200.  The  subsequent  in- 
fusion of  about  16,000,000  pesos  in  paper  notes  into  the 
circulation  and  the  rise  of  exchange  as  high  as  2,000,  was 
not  reflected  generally  by  a  corresponding  rise  in  prices 
and  wages.  To  return,  therefore,  to  an  exchange  ap- 
proximating that  of  the  close  of  the  year  1910  would  not 
involve  serious  readjustments. 

3. — Restoring  the  purchasing  power  of  wages.  As 
wages  usually  fail  to  advance  as  rapidly  as  bad  paper 
money  depreciates,  so  they  usually  fail  to  fall  promptly 
upon  the  restoration  of  such  paper  to  a  higher  gold 
value.  How  far  and  how  soon  wages  are  subject  to  re- 
duction to  meet  an  enhancement  of  the  gold  value  of  the 
medium  of  exchange,  depends  upon  such  factors  as  the 
demand  for  labor,  the  adequacy  of  the  supply,  and  the 
ability  of  the  wage-earners  to  resist  reductions.  In  the 
case  of  Nicaragua,  the  evidence  submitted  to  us  seemed 
to  indicate  that  in  the  mines  and  other  industries  where 
partially  skilled  labor  is  in  continuous  demand,  a  slight 
increase  in  the  gold  value  of  the  wage  would  not  lead 
to  its  reduction  in  terms  of  the  new  currency.  It  was 
frankly  acknowledged  by  several  employers  that  labor  had 
suffered  by  the  rise  in  exchange  and  that  a  small  advan- 
tage derived  from  an  enhancement  of  the  value  of  the 
unit  would  only  restore  to  the  laborer  that  to  which  he 
was  entitled.  We  are  doubtful  whether  the  wages  of  the 
agricultural  laborer  have  been  raised  to  correspond  with 
an  exchange  of  1,800  or  2,000,  or  indeed  beyond  the  point 
of  1,250.  But  if  they  have  been  so  raised,  it  is  best  so, 
for  these  wages  were  very  low,  probably  too  low,  for 
efficiency. 


26 

4. — The  increased  gold  value  of  the  public  revenue 
and  the  consequent  lightening  of  the  burden  of  foreign 
debt.  It  is  peculiarly  difficult,  where  everything  is  a 
matter  of  politics,  to  impose  taxation  in  Latin  America. 
The  revenue  is  derived  mainly  from  the  Custom  House 
with  substantial  assistance  from  excise  and  a  little  in- 
come from  the  railway  and  minor  monopolies,  the  postal 
and  telegraph  systems  being  run  at  a  loss.  In  the  matter 
of  duties,  the  prices  of  liquor,  fares  for  passengers  and 
goods,  and  telegraphic  and  postal  charges,  it  is  not  easy 
and,  in  some  cases,  is  almost  impossible  to  make  radical 
changes  in  rates  to  which  the  public  have  become  ac- 
customed. In  these  circumstances  the  advantage  of  a 
high  gold  value  is  not  one  to  be  lightly  foregone. 

Nicaragua,  moreover,  has  now  a  gold  debt  which  is 
very  considerable  in  the  light  of  its  present  resources, 
and  it  has  considerable  liabilities  in  salaries  and  fixed 
charges  calculable  on  this  basis ;  it  is,  therefore,  a  matter 
of  great  importance  to  it  and  to  its  foreign  creditors,  that 
the  gold  value  of  the  medium  in  which  its  revenue  is 
collected  should  be  as  high  as  possible. 

5. — Existing  pledges  by  the  Government. 

The  Government  recognized,  when  making  the  emis- 
sions of  paper  in  1911,  that  the  inevitable  result  would  be 
to  accelerate  its  depreciation.  To  reassure  the  people, 
and  possibly  with  a  vague  idea  that  the  natural  result  of 
monetary  wrongdoing  would  be  averted  by  the  millen- 
nium expected  from  American  assistance,  a  decree  was  is- 
sued of  which  the  text  is  reproduced : 

THIS  DAY  HAS  BEEN  ISSUED  THE  FOLLOWING  DEGREE  : 

The  President  of  the  Bepublic,— 

Considering,  that  the  constant  fluctuations  of  exchange 


27 

profoundly  affect  the  economic  situation  of  the  country, 
occasioning  noticeable  perturbations  in  the  market  price 
of  articles  of  consumption;  and  that  it  is  the  duty  of 
the  government  to  prevent,  as  far  as  possible,  the  in- 
jury to  which  the  wealth  of  the  country  is  exposed ;  that 
the  national  bills,  as  the  standard  money  of  the  Ee- 
public,  should  have,  according  to  law,  a  fixed  value  in 
order  to  establish  a  permanent  ratio  which  should  meas- 
ure the  liability  of  the  government  issuing  the  bills. 

That  this  relation  for  our  bills  in  circulation  should 
be  fixed  with  reference  to  American  gold,  and  in  view 
of  the  fact  that  serious  negotiations  are  pending  for  a 
loan  which  will  soon  enable  the  government  to  maintain 
effectively  the  value  legally  assigned  to  the  present  cir- 
culating medium. 

That,  taking  into  account  the  amounts  issued  up  to 
date,  which  circulate  freely  in  the  market,  the  different 
rates  of  exchange  at  the  time  of  the  several  emissions, 
and  also  the  present  state  of  production  in  the  country, 
it  appears  that  1,200  per  cent,  is  the  ratio  of  bills  to  gold 
in  drafts  at  three  days'  sight  and  is  an  acceptable  rate, 
which  harmonizes  satisfactorily  with  the  general  eco- 
nomic interests  of  the  country.  Therefore,  in  the  exer- 
cise of  legal  authority, — 

BE  IT  DECREED: 
Sole  article. 

The  Government  of  Nicaragua  will  recognize  and  ac- 
cept one  thousand  two  hundred  per  cent,  of  exchange 
as  the  fixed  ratio  between  the  national  bills  and  the 
American  dollar — that  is,  twelve  pesos  in  bills  for  each 
dollar  in  American  gold  in  drafts  at  three  days'  sight. 

Given  in  Managua  on  the  eighth  day  of  June,  1911. — 
Diaz. — The  Minister  of  Finance, — Sandino. 
Yours  faithfully, 

(signed)     SANDINO. 


28 

The  Government  of  Nicaragua  which  issued  this  de- 
cree, and  the  people  to  whom  it  was  addressed  should 
have  known  pretty  well  that  the  rate  of  exchange  is  de- 
termined by  economic  law,  and  that  this  announcement 
was  only  a  futile  statement  that,  in  this  case,  effect  would 
not  follow  cause.  Some  weight,  however,  should  be  at- 
tached to  this  pronouncement.  In  the  first  place,  the 
public  must  to  some  extent  have  regulated  their  future 
business  on  this  basis,  considering  not  that  the  theorem 
was  true  but  that  the  government  had  pledged  its  word 
to  make  good  the  consequences  of  its  action.  In  the 
second  place,  this  matter  has  a  political  aspect  not  to  be 
ignored.  The  party  which  came  into  power  became  much 
discredited  owing  to  these  emissions.  If,  therefore,  it 
was  feasible  for  it  to  retrace  its  steps  and  restore  the 
status  quo,  it  was  well  that  this  should  be  done. 

6. — Practicability. 

Much  of  the  success  of  an  operation  designed  to  call 
LQ  notes  naturally  depends  upon  how  and  where  they 
are  held.  In  the  present  case  conditions  are  somewhat 
favorable.  Large  emissions  of  notes  made  at  short  in- 
tervals and  without  any  consideration  of  the  monetary 
vsituation  tend  inevitably  to  accumulate  in  the  reserves 
of  banks  and  other  strong  hands.  In  Nicaragua  these  tend- 
encies toward  congestion  have  been  accentuated  by  the 
causes  which  prompted  the  emissions.  These  were  made 
in  large  sums,  some  of  which  being  intended  for  the 
troops  were  ultimately  distributed  in  due  course  amongst 
lowly  recipients,  but  the  greater  part  were  made  over  to 
firms  and  private  individuals  who  furnished  supplies  or 
money  to  the  revolution,  or  who  had  suffered  from  forced 
loans  or  exactions  since  so  far  back  as  the  year  1893. 
Many  of  the  recipients,  seeing  the  grave  fluctuations  in 
exchange  occurring  daily,  and  expecting  much  from  the 


29 

loan  obtained  by  the  aid  of  the  American  Government, 
held  the  sums  made  over4o  them,  and  portions  are  still 
so  held  by  them  and  by  the  banks  on  their  account,  or 
by  the  banks  for  themselves. 

Some  force,  though  perhaps  not  much,  also  attaches 
to  the  argument  which  has  in  fact  been  emphatically  em- 
ployed by  the  Finance  Minister  when  conferring  with  his 
political  friends  in  Granada  (to  whom  the  greater  part 
of  these  payments  have  been  made)  that  those  who  have 
benefited  at  the  expense  of  their  country  by  the  deprecia- 
tion of  the  currency  for  their  advantage,  are  now  pe- 
culiarily  bound  to  bring  forward  their  holdings  for  re- 
demption at  such  a  rate  as  will  admit  of  a  conversion 
favorable  to  the  public  interests. 

We  have  now  enumerated  the  various  considerations 
bearing  upon  the  method  of  conversion  and  the  rate  to 
be  adopted,  which  have  influenced  us  in  making  our  rec- 
ommendations. 

XI. — SUSPENSION  OF  FURTHER  CURRENCY  ISSUES. 

One  of  the  first  steps  taken  to  prevent  the  further 
depreciation  of  the  paper  circulation  was  to  request  an 
assurance  that  no  further  issues  of  paper  currency  should 
be  made  and  that  this  assurance  should  be  embodied  in 
law.  Already,  before  our  arrival  in  Nicaragua,  such  a 
promise  had  been  given  by  the  government  to  the  Amer- 
ican Charge  d 'Affaires.  The  fact,  however,  that  issues 
of  new  notes  had  continued  up  to  October  24,  1911, — 
some  two  weeks  after  the  ratification  by  the  National 
Assembly  of  Nicaragua  of  the  Treasury  Bills  Agree- 
ment,— and  that  the  Government  was  under  the  most 
pressing  need  for  money  after  the  segregation  of  customs 
receipts  for  the  service  of  the  loan,  led  us  to  feel  that 
it  was  desirable  to  emphasize  our  position  by  asking  for  a 


30 

definite  written  assurance  from  the  President  of  the  Be 
public  that  no  more  government  paper  should  be  issued. 
This  assurance  was  obtained  in  correspondence,  which  is 
appended  to  this  report.* 

XII. — METHOD  OF  OBTAINING  STABILITY  OF  EXCHANGE. 

Enough  of  the  ground  has  now  been  cleared  to  pro- 
ceed to  discuss  in  some  detail  the  monetary  plan  we  have 
prepared,  part  of  which  is  already  embodied  in  contracts 
and  in  the  statute  law  of  Nicaragua.  The  main  idea  is 
to  reduce  by  purchase  the  volume  of  the  existing  paper 
money  until  an  exchange  of  1,250  is  attained,  and  then 
to  substitute  for  the  remainder  notes  of  the  National 
Bank  of  an  equivalent  value  and  convenient  denomina- 
tions based  on  the  same  gold  unit  as  the  United  States 
now  uses,  viz.,  the  gold  dollar,  officially  designated  the 
cordoba.  Below  these  notes  provision  is  made  for  suit- 
able silver,  nickel  and  bronze  coins  which  will  all  be 
token  coins  of  limited  legal  tender  with  the  exception  of 
the  silver  dollar,  which  will  be  unlimited  legal  tender,  al- 
though, like  paper  money,  it  is  really  a  token  currency 
redeemable,  under  certain  conditions,  in  gold.  The  mat- 
ter of  the  metallic  currency  is  dealt  with  in  detail  at 
greater  length  hereafter,  and  is  merely  referred  to  now 
to  give  a  bird's-eye  view  of  the  proposals. 

So  far  only  mention  has  been  made  of 

(a)  The  recall  of  the  note  issue  in  excess  of  the 
quantity  which  would  be  required  at  an  exchange 
of  1,250; 

(b)  The  substitution  of  National  Bank  Notes  for 
the  residue;  and 

(c)  The   coinage  of  suitable   silver,  nickel   and 
copper  coins. 

*See  Appendix  D,  pp.  81-84. 


31 

But  the  crucial  matter  is  to  maintain  the  paper  and 
metallic  currency  on  a  gold  basis  at  the  exchange  de- 
termined upon.  Obviously  this  is  primarily  a  question 
of  the  amount  of  currency  to  be  maintained  and  the  re- 
sources available  to  maintain  it.  On  page  15  it  is  stated 
that  a  conservative  estimate  of  the  true  exchange  on 
a  basis  of  a  circulation  of  48%  millions  of  pesos  is  2,000. 
By  this  it  is  merely  meant  that  if  48%  millions  were  in 
circulation,  the  rate  of  exchange  would  probably  be  about 
2,000  or  even  higher,  instead  of  the  rate  recently  ruling, 
1,800.  As  a  matter  of  fact,  when  account  is  taken  of  loss 
by  fire,  water,  climate,  insects  or  other  causes,  it  is  cer- 
tain that  the  amount  of  paper  in  existence  is  much  less 
—perhaps  a  fair  estimate  would  be  47  millions.  We 
would  put  it  much  lower,  were  it  not  for  the  fact  that 
the  greater  part  of  the  issues  are  comparatively  recent. 
Further,  a  considerable  quantity  of  the  recent  issues  have 
never  entered  the  general  circulation,  or  have  been  with- 
held in  Managua  and  Granada  for  the  rise.  About  a 
million  and  a  half  is  also  locked  up  in  customs  collec- 
tions and  not  yet  remitted  to  New  York.  Perhaps  the 
real  circulation  which  is  to  be  taken  into  account  as  pro- 
ducing the  current  rate  of  exchange  is,  therefore,  nearer 
42  millions  than  47. 

Very  crudely  stated,  the  problem  is  this :  If  exchange 
was,  in  round  figures,  975  when  the  amount  circulating 
was  (in  1910)  about  12  millions,  and  is  1,800  when  the 
amount  circulating  is  42  millions,  what  is  the  amount  of 
currency  that  can  be  sustained  at  an  exchange  of  1,250? 
The  answer  to  this  is  a  figure  about  30  millions.  It  would 
appear,  therefore,  that  the  difference  between  47  and 
30  milions,  namely,  17  millions,  has  to  be  recalled  and 
cancelled  before  an  exchange  of  1,250  is  attained.  Per- 
sonally, we  are  of  opinion  that  it  will  not  be  necessary 
to  recall  so  much.  So  soon  as  peace  and  security  are  in- 


32 

sured,  the  monetary  needs  of  the  country  will  expand 
very  rapidly,  and  it  is  to  be  expected  that  the  Atlantic 
Coast  of  Nicaragua  will  come  into  line  and  use,  to  a  con- 
siderable extent,  the  National  Bank's  paper.  Hitherto 
the  merchants  and  people  on  that  side  of  the  country 
have  resolutely  refused  to  have  anything  whatsoever  to 
do  with  the  existing  depreciated  paper. 

As  already  set  forth,  we  were  of  the  opinion,  when 
studying  the  facts  on  the  spot,  that  the  premium  on  gold 
could  be  brought  down  to  1250.  Nothing  has  occurred, 
since  that  opinion  was  formed  and  operations  have 
commenced,  to  shake  our  belief.  It  may  be,  how- 
ever, that  the  amount  it  is  necessary  to  retire  will  prove 
to  be  more  than  the  lower  estimate,  and  it  is  conceivable 
that  the  higher  figures  will  be  exceeded.  In  this  unlikely 
event  the  question  of  fixing  exchange  higher  than  1250 
will  have  to  be  faced,  and  power  has  been  taken  to  adopt 
a  rate  as  high  as  1500.  There  is  no  occasion  for  haste. 
We  are  informed  that  the  dies  for  the  new  coinage  are 
not  likely  to  be  ready  for  several  months.  It  is  therefore 
certain  that  the  date  of  introduction  of  the  new  currency 
will  have  to  be  postponed.  Probably  a  delay  of  three 
months  will  be  inevitable.  This  breathing  space  will  af- 
ford ample  opportunity  for  ascertaining  whether  the 
quantity  of  paper  money  to  be  absorbed  is  in  accordance 
with  our  estimate.  For  the  reasons  developed  at  length 
in  this  report,  we  are  very  reluctant  to  fix  the  premium 
on  gold  higher  than  1250.  Should,  therefore,  circum- 
stances subsequently  show  that  this  exchange  cannot  be 
attained  by  September  or  thereabouts,  we  would  recom- 
mend a  further  extension  until  the  end  of  the  year,  rather 
than  the  abandonment  of  the  effort  to  attain  it. 

XIII. — COST  OF  THE  OPERATION. 

Upon  a  consideration  of  these  data,  let  it  be  assumed 
that  it  will  be  necessary  to  buy  in  about  12  millions  of 


33 

paper.  We  now  pause  to  calculate  the  cost  of  the  pur- 
chase. In  the  currency  act  intimation  has  been  given 
that  the  rate  of  exchange  would  eventually  be  fixed  at 
1,500  or  such  lower  rate  as  might  be  found  feasible,  the 
intention  being  to  endeavor  to  attain  and  establish  the 
rate  of  1,250.  It  therefore  follows  that  the  rate  antici- 
pated largely  governs  the  rate  at  which  purchases  can 
be  made  in  the  interval.  The  considerations  here- 
tofore mentioned*  are  also  elements  in  the  situa- 
tion. In  the  circumstances,  we  hope  to  secure  im- 
mediately a  large  block  of  bills  (6,400,000  pesos)  from 
the  public,  and  about  1,600,000  pesos  from  the  Collector- 
General  of  Customs  at  the  rate  of  1,600,  that  is  to  say, 
8  millions  of  pesos  at  a  cost  of  $500,000.  To  carry 
through  this  operation  it  has  been  necessary  to  agree  on 
the  part  of  the  Government  not  to  sell  exchange  to  the 
public  except  in  the  neighborhood  of  this  rate  for  the 
next  few  weeks.  For  the  remaining  four  millions  it  may 
be  necessary  to  pay  an  average  exchange  of  about  1,400 
or  say  7  cents  to  the  dollar,  which  works  out  at  $280,000. 

The  total  cost  of  reducing  the  currency  to  a  par  of 
1,250,  upon  the  estimates  above  set  forth,  would  be 
$780,000. 

Under  the  treasury  bills  agreement  the  amount  pro- 
vided for  the  reform  of  the  currency  and  the  foundation 
of  a  bank  is  $1,500,000.  For  the  latter  purpose  a  specific 
sum  of  $100,000  only  is  set  apart;  a  further  sum  of  per- 
haps $70,000  must  be  deducted  for  preliminary  expenses, 
lawyers'  and  experts'  fees  and  telegrams;  and  about 
$180,000  should  be  allotted  for  the  coining  of  about  $300,- 
000  of  silver  and  fractional  currency  and  for  agency  com- 
missions, including  the  cost  of  recalling  the  old  notes  and 
issuing  the  new.  In  other  words,  the  net  amount  available 


*On  pages  28  and  29. 


34 

for  protecting  the  note  issue  and  the  metallic  currency 
is  $1,500,000,  subject  to  the  deduction  of  the  sums  of 
$100,000,  $70,000,  and  $180,000,  leaving  $1,150,000.  Of 
this  sum  it  has  been  shown  that  about  $780,000  will  be  re- 
quired to  absorb  the  excess  of  old  notes,  leaving  a  clear 
balance  of  only  $370,000.  Whatever  system  be  intro- 
duced for  the  new  currency,  we  felt  that  this  residue  was 
in  any  event  insufficient. 

XIV. — RECOMMENDATION   TO   INTRODUCE   THE   EXCHANGE 

STANDARD. 

As  the  whole  cost  of  the  reform  has  to  be  borrowed 
and  Nicaragua's  resources  are  slender,  we  determined 
to  recommend  that  the  exchange  standard  system  of 
currency,  as  being  the  most  economical,  be  adopted  for  the 
first  few  critical  years.  This  system  was  first  tried  by 
Holland  in  Java,  then  on  a  gigantic  scale  in  India,  there- 
after in  the  Phillipines  and  in  one  form  or  another  else- 
where, in  every  case  with  success.  Briefly  stated,  the 
idea  underlying  this  system  is  that  it  is  possible  to  keep 
the  currency  of  a  country,  whether  a  paper  or  metallic 
currency,  at  a  parity  with  the  currency  of  another  country 
or  countries  by  providing  a  reserve  fund,  by  means  of 
which  its  paper  or  metallic  currency  can,  when  its  value 
tends  to  rise  or  fall  in  terms  of  the  other  currency,  be 
decreased  or  increased  until  its  value  is  restored  to  the 
former  parity. 

Experience  with  the  gold  exchange  standard  has 
shown,  however,  that  it  is  possible  to  build  up  such  a 
reserve  to  a  considerable  amount  without  imposing  any 
burden  upon  the  finances  of  the  country  where  the  sys- 
tem is  in  operation.  The  chief  sources  for  building  up 
such  a  reserve,  without  borrowing  or  taxation,  are  three : 


35 

The  seigniorage  profits  on  the  coinage  of  silver;  the 
premiums  charged  for  the  sale  of  drafts  and  bills  of  ex- 
change; and  interest  upon  the  exchange  funds ' when  in- 
vested in  securities  or  deposited  with  banking  institutions 
in  financial  centres.  The  seigniorage  upon  new  coinage 
is  usually  the  most  important  of  these  items,  and  amounts 
to  a  large  proportion  of  the  face  value  of  the  currency 
issued  if  the  rate  of  coinage  adopted  departs  consider- 
ably from  the  market  value  of  the  bullion  contained  in  the 
coin. 

The  profits  upon  the  sale  of  drafts  upon  a  gold  ex- 
change fund,  while  they  do  not  look  so  impressive  as  the 
profits  upon  coinage,  are  repeated  over  and  over  in  the 
course  of  transfers  of  capital  and  credit  in  both  direc- 
tions; while  the  profit  from  the  seigniorage  occurs  only 
once — at  the  time  of  the  coinage. 

The  third  source  of  profit  to  the  exchange  fund — 
interest  on  investments  or  on  deposits  where  any  such 
use  of  the  fund  is  justifiable — is  also  of  some  importance 
when  rates  for  money  are  high  in  the  financial  centre 
where  the  reserve  is  kept. 

In  the  Philippine  Islands,  according  to  a  recent  state- 
ment made  public  by  the  War  Department,  the  gold  stand- 
ard fund  stood,  on  June  30,  1911,  at  $10,308,877,  the 
entire  amount  being  the  proceeds  of  the  seigniorage  on 
silver  coinage,  the  sale  of  drafts,  and  interest  on  the 
deposit  of  the  reserve  funds  in  the  United  States,  after 
the  deduction  of  considerable  amounts  for  interest  on 
temporary  loans  incurred  for  the  purchase  of  silver  and 
certain  other  charges.*  As  the  circulation  of  Nicaragua 
at  commencement  will  probably  not  exceed  about  one- 
eighth  of  the  Philippine  currency,  the  amount  of  profit 
will  necessarily  be  smaller,  but  it  is  also  likely  to  be  con- 
siderable. 


*See  Appendix  F,  p.  129. 


36 

XV. — APPLICATION  TO  THE  PRESENT  CASE. 

In  applying  this  system  in  Nicaragua,  let  it  be  as- 
sumed that  the  par  of  1,250  has  been  reached  by  the 
steps  already  described.  If  the  exchanges  go  to  say  1,400, 
this  means  that  there  is  too  much  currency  to  support 
the  par  of  1,250.  As  the  reserve  fund  sells  to  all  comers 
at  1,250,  the  market  will  tender  Nicaraguan  currency  for 
drafts  on  New  York  until  the  exchanges  return  to  1,250. 
Contrariwise,  if  the  exchanges  go  to,  say,  1,100,  the  mar- 
ket will  tender  gold  in  New  York  for  drafts  on  Nicaragua 
until  the  Nicaraguan  currency  is  so  increased  that  its 
sales  in  terms  of  gold  drop  to  the  rate  of  1,250.  Ob- 
viously if  the  movements  in  either  direction  roughly  bal- 
ance and  a  profitable  commission  is  charged  upon  the  sale 
of  drafts,  the  reserve  fund  is  steadily  augmented  by  the 
brokerage,  &c.,  earned.  So,  too,  if  the  movement  is  on 
balance  for  drafts  on  Nicaragua,  the  reserve  becomes 
stronger,  for  these  drafts  are  honored  by  the  issue  of 
notes  or  silver  in  Nicaragua  on  which  there  is  a  consider- 
able profit  (whichever  medium  be  demanded),  credited 
to  the  reserve.  Danger,  however,  lies  in  the  other  direc- 
tion. Should  the  balance  of  trade  turn  against  Nicaragua 
the  demand  for  drafts  on  New  York  naturally  consti- 
tutes a  drain  upon  the  reserve,  and  in  this  connection 
due  importance  must  be  attached  to  the  burden  of  gold 
debt,  since  the  remittance  of  capital  repayments  and  in- 
terest come  on  the  unfavorable  side  of  the  balance. 

As  against  these  considerations  it  must  be  remembered 
that  the  balance  of  trade  in  Nicaragua  is  generally  favor- 
able :  that  the  burden  of  interest  is  greater  than  formerly, 
but  not  so  very  much  greater,  and  that  the  effect  of  lock- 
ing up  Nicaraguan  currency  in  large  quantities  by  the 
release  of  gold  in  New  York  tends  to  raise  the  value  of 
Nicaraguan  currency  and  so  of  itself  to  induce  a  reverse 
movement  in  the  exchanges. 


37 

It  is  our  belief  that  the  trade  of  Nicaragua  will  ex- 
pand under  a  stable  government ;  that  this  expansion  will, 
as  is  usual  in  new  countries,  be  mainly  agricultural,  and 
that  the  balance  of  trade  is  likely  to  remain  in  favor  of 
Nicaragua,  as  has  been  the  experience  of  the  world  in 
similar  circumstances.  But  the  fact  that  the  present  bor- 
rowings are  to  be  repaid  in  a  short  space  of  time  will 
necessitate  a  skilful  handling  of  the  situation. 

The  necessity  for  economy  is  one  of  the  strongest 
arguments  for  our  proposals.  The  exchange  standard  sys- 
tem only  converts  the  internal  currency  of  the  country  into 
gold,  when  gold  is  required  to  settle  foreign  obligations. 
It  discourages  all  but  the  inevitable  demands  by  convert- 
ing only  large  amounts,  and  it  makes  the  conversion  in 
the  most  inexpensive  manner  by  giving  gold  where  it  is, 
instead  of  first  importing  it  into  Nicaragua.  Withal,  it  is 
clear  that  the  balance  at  disposal  of  the  exchange  fund  is, 
as  stated  on  page  34,  not  adequate.  The  amount  of  paper 
money  circulating  at  commencement  will  be  35  millions 
of  pesos  or  $2,800,000  and,  say,  $300,000  of  metallic  cur- 
rency. Against  this  is  the  370,000  dollars  and  the  in- 
trinsic value  of  the  metallic  currency  which  is  about  120,- 
000  dollars,  or  in  round  figures  a  total  of  $500,000.  That 
is  to  say,  the  reserve  is  not  equal  to  20%  of  the  outstand- 
ing currency.  In  these  circumstances  it  becomes  impera- 
tive to  provide  some  further  backing,  and  this  has  been 
wisely  arranged  for  by  the  bankers  at  the  least  expense 
to  the  state,  by  the  grant  of  a  credit  of  $500,000  to  be 
drawn  upon  if  the  cash  reserve  is  exhausted. 

Taking  this  into  consideration,  the  exchange  fund  as 
now  constituted  should  be  sufficient  to  maintain  the  cur- 
rency of  Nicaragua  at  the  par  of  1,250. 

XVI. — MANAGEMENT  OF  THE  EXCHANGE  FUND. 
In  providing  for  an  exchange  fund  on  deposit  in  New 


38 

York,  subject  to  drafts  for  the  purpose  of  maintaining 
the  parity  of  the  currency,  it  is  not  contemplated  that 
the  business  of  dealing  in  foreign  exchange  will  be  mon- 
opolized by  operations  upon  this  fund.  The  purpose  of 
the  fund  is  essentially  to  protect  the  exchanges  when 
they  tend  to  become  adverse,  and  not  to  deprive  existing 
banks  and  bankers  of  the  business  in  small  drafts  while 
operations  in  one  direction  approximately  balance  those 
in  the  other.  The  limitation  that  drafts  upon  this  fund 
shall  be  sold  only  in  amounts  of  not  less  than  $5,000  after 
the  National  Bank  is  established  is  an  indication  of  this 
purpose. 

In  practice,  the  local  banks  are  likely  to  be  the  chief, 
if  not  the  only,  purchasers  of  drafts  upon  the  fund. 
By  buying  drafts  in  multiples  of  $5,000,  they  will  be 
able  to  cover  drafts  for  smaller  amounts  sold  by  them, 
and  will  be  able  to  charge  their  clients  a  reasonable  profit 
above  the  rate  of  exchange  paid  to  the  National  Bank  for 
large  drafts,  in  order  to  compensate  themselves  for  the 
labor  and  expense  involved  in  subdividing  the  amounts 
drawn.  There  is,  indeed,  nothing  in  the  monetary  law, 
nor  in  its  possible  application,  to  prevent  the  National 
Bank  itself  from  keeping  funds  in  New  York  or  else- 
where, for  exchange  purposes,  independent  of  the  ex- 
change fund  herein  provided  for  the  purpose  of  main- 
taining the  parity  of  the  currency.  In  other  words,  the 
fundamental  purpose  of  the  fund,  after  the  exchange  is 
fixed,  is  to  guard  against  a  decided  balance  of  demand 
for  exchange  in  either  direction,  and  not  to  interfere 
with  ordinary  transactions,  for  which  the  local  banks 
would  usually  have  ample  funds  and  which  would,  in  the 
usual  course  of  business,  nearly  balance  each  other.  The 
policy  of  the  National  Bank  in  dealing  with  exchange, 
apart  from  the  official  fund,  is  left  to  the  policy  and  dis- 
cretion of  its  management. 


39 

The  commission  for  drafts  upon  the  exchange  fund  is 
fixed  in  the  monetary  law  somewhat  below  current  com- 
missions charged  in  Managua  for  drafts  upon  New  York 
and  other  foreign  points.  It  is  probable  that  this  will 
have  a  tendency  to  reduce  somewhat  the  range  of  rates 
of  commission  charged  upon  ordinary  exchange  opera- 
tions, but  not  necessarily  to  divert  to  the  National  Bank 
the  entire  business  in  exchange.  It  was  necessary  to 
give  considerable  latitude  to  the  Government  of  the  Ee- 
public  and  the  administration  of  the  bank  in  fixing 
charges  for  drafts  upon  the  exchange  fund,  in  order  that 
the  utility  of  the  fund  might  be  adapted  to  conditions  as 
they  arise ;  moreover,  the  commercial  development  of  the 
country  will  not  suffer  if  the  existence  of  the  exchange 
fund,  and  the  competition  of  the  National  Bank,  through 
other  sources  at  its  command,  tend  to  establish  lower 
charges  than  now  prevail,  and,  in  consequence,  to  en- 
courage a  freer  movement  of  capital  than  now  takes 
place  between  Nicaragua  and  foreign  financial  centres. 

XVII. — SILVER  AND  FRACTIONAL  CURRENCY. 

In  monetary  matters,  what  people  need  can  only  be 
ascertained  by  experiment.  Silver  was  in  general  use 
prior  to  the  depreciation  of  the  paper  currency,  and  the 
notes  of  the  Bank  of  Nicaragua  were  redeemable  in  this 
medium.  According  to  the  well-established  rule,  that  a 
cheaper  legal  tender  will  drive  out  a  dearer,  silver  pesos 
were  driven  from  circulation  by  the  government  paper 
money,  and  were  soon  followed  by  the  subsidiary  coins. 
Such  silver  coins  of  Nicaragua  as  are  still  in  existence, 
are  reported  to  be  in  circulation  to  some  extent  in  Hon- 
duras, and  others  have  gone  to  the  melting  pot  or  other- 
wise disappeared.  Silver  is  still  the  money  of  the  East 
Coast,  which  has  refused  to  have  anything  whatsoever 


40 

to  do  with  the  government  paper  money,  even  preferring 
to  pay  dues  in  silver  rather  than  snatch  a  temporary 
profit  by  tendering  paper,  and  so  encourage  its  introduc- 
tion. 

There  appears  to  be  no  doubt  that  silver  coins,  having 
a  fixed  gold  value,  whether  they  were  full  legal  tender  or 
only  limited  tender,  would  be  readily  accepted  on  the 
East  Coast,  and  eventually  in  the  western  part  of  Nic- 
aragua, where  paper  is  now  (with  the  exception  of  a  few 
nickel  coins  of  small  value)  the  only  medium  of  exchange. 
There  are  several  reasons  why  silver  coins  would  be 
acceptable  as  a  limited  tender  for  small  amounts,  which 
have  even  more  force  in  a  country  like  Nicaragua,  sub- 
ject in  some  degree  to  tropical  conditions,  than  in  coun- 
tries in  the  temperate  zone.  Among  these  reasons  may 
be  suggested  those  of  cleanliness  and  sanitary  protec- 
tion, and  the  comparative  durability  of  the  coin  over 
paper. 

The  present  paper  currency,  especially  the  pieces  of 
low  denomination,  which  pass  from  hand  to  hand  in  small 
transactions,  is  in  many  cases  in  a  filthy  condition.  Much 
of  it  is  so  torn  and  defaced  that  even  the  denominations 
are  recognizable  with  difficulty.  The  government  has 
from  time  to  time  endeavored  to  replace  such  worn  and 
soiled  paper  with  new  issues,  but  financial  conditions 
have  been  such  that  there  has  often  been  a  temptation 
to  permit  the  continued  circulation  of  such  of  the  old 
paper  as  could  be  used,  rather  than  to  retire  and  destroy 
it.  Existing  notes  of  the  one  peso  and  half  peso  are 
now  worth  about  six  cents  and  three  cents,  gold.  That 
is,  they  are  the  pocket  money  of  the  people  and,  owing 
to  the  rapidity  of  their  circulation  and  the  people's  hab- 
its, they  are  in  a  dirty  and  unsanitary  condition.  They 
should  be  retired  and  destroyed  as  soon  as  they  can  be 
replaced  by  metallic  currency.  Moreover,  silver  is  less 


41 

destructible  than  paper.  While  paper  is  easily  carried, 
it  is  often  welded  into  an  undistinguishable  mass  when 
subjected  to  tropical  rains  or  other  accidents.  In  the 
hands  of  a  laborer  or  small  producer  who  receives  money 
in  payment  for  wages  or  produce,  silver  would  undoubt- 
edly be  preferred  in  many  cases  to  paper.  It  can  be 
hidden  in  a  closet  or  under  a  piece  of  flooring,  or  even 
buried,  without  risk,  which  exists  in  the  case  of  paper, 
of  destruction  by  moisture  and  insects. 

On  the  East  Coast,  where  silver  is  now  practically  the 
only  form  of  currency,  the  existing  preference  for  silver 
over  paper  may  even  prevail  after  the  paper  is  recog- 
nized as  good.  We  have,  therefore,  recommended  an 
experimental  coinage  of  a  few  silver  cordobas.  But  we 
hope  that  the  highest  coin  in  general  use  will  be  the  50- 
cent  piece.  We  have  a  strong  preference  in  matters  of 
money  for  following  the  line  of  least  resistance — that  is 
to  say,  giving  the  people  what  they  need.  Should  they 
find  the  silver  cordoba  less  convenient  than  the  note,  they 
will  abandon  its  use.  On  the  other  hand,  if  experience 
teaches  them  that  it  is  a  better  medium,  they  ought  to 
have  it.  Contrariwise,  we  have  no  prejudice  against  the 
fifty-cent  note,  if  there  appears  to  be  a  demand  for  it,  in 
which  case  an  experimental  issue  can  be  made.  In  mone- 
tary matters,  the  paradox  holds  that  to  promote  the 
acceptance  of  any  currency,  it  is  wiser  to  be  eager  to 
receive  than  anxious  to  part  with  it.  At  present  Nic- 
aragua is  adverse  to  its  introduction.  After  recent  bit- 
ter experience  the  people  on  both  coasts  want  something 
they  can  bite,  and  on  the  Atlantic  side  they  will  at  pres- 
ent have  none  of  the  4*  unclean  thing " — paper  currency. 

With  the  paper  peso  reduced  as  it  has  been  by  over- 
issue to  a  value  of  less  than  six  cents  gold,  50  cents  gold 
is  equivalent  to  about  nine  pesos.  A  coin  having  a  gold 


42 

value  of  50  cents  would  represent,  therefore,  among  the 
laboring  classes,  a  high  denomination.  In  these  circum- 
stances there  is  likely  to  be  room  for  a  considerable 
quantity  of  smaller  coins.  We  have,  therefore,  provided 
for  silver  coin  of  denominations  of  50,  25  and  10  centavos, 
a  nickel  coin  of  5  centavos,  and  copper  coins  as  low  as  1 
and  %  centavos. 

Enough  has  been  said,  we  hope,  to  indicate  that  our 
recommendation  to  adopt  the  dollar  and  its  subdivisions 
under  appropriate  local  designations  is  right,  in  view  of 
both  theoretical  and  local  considerations. 

In  regard  to  fineness  we  have  followed  the  advice  of 
the  assay  office  in  England.  A  fineness  of  800  is  believed 
to  be  better  than  835  for  technical  reasons,  the  chief  of 
which  are  suitability  for  manufacture  and  resistance  to 
friction. 

In  the  foregoing  no  allusion  has  yet  been  made  to  the 
profit  resulting  from  the  silver  currency  costing  less  than 
its  face  value,  for  we  feel  strongly  that  it  is  wisest  to  ap- 
proach the  question  as  far  as  it  is  practicable  without 
any  bias  of  this  nature.  There  will  be  a  very  consider- 
able profit,  amounting  to  not  less  than  50  per  cent,  of  the 
face  value  of  the  silver  currency  maintained  in  the  circu- 
lation, after  deducting  all  costs  of  manufacture  and 
supervision.  We  recommend  that  the  whole  of  this 
revenue  be  carried  to  the  exchange  fund  until  the  reserve 
in  gold  and  commercial  paper  is  not  less  than  70  per  cent, 
of  the  net  circulation.  The  allocation  of  this  revenue 
thereafter  is  discussed  later  on. 

XVIII. — WEIGHT  AND  FINENESS  OF  THE  FRACTIONAL 
CURRENCY. 

Theoretically,  the  intrinsic  value  of  a  token  coin  is  not 
a  matter  of  much  account.  Its  value  in  exchange  depends 


43 

on  what  is  behind  it.  Should  the  backing  be  exhausted, 
and  it  became  necessary  to  offer  the  token  coins  for  their 
bullion  value,  the  amount  so  realized  would  be  a  bagatelle, 
in  view  of  the  catastrophe  occasioned  by  the  disorganiza- 
tion of  the  monetary  system.  For  example,  in  the  United 
States,  silver  certificates  circulate  at  a  par  with  other 
currency, — not  because  they  are  secured  by  silver,  which 
would  be  unsalable  on  a  breakdown,  but  because,  they 
are  received  for  public  dues,  and  the  total  currency  cir- 
culating is  not  in  excess  of  the  country's  needs. 

Speaking  broadly,  it  is  wise  and  usual  in  effecting  a 
monetary  change  to  follow  the  line  of  least  resistance 
and  leave  the  people  with  what  they  are  accustomed  to. 
In  the  past,  therefore,  the  unit  of  silver  taken  has  not, 
as  a  rule,  departed  widely  in  weight  and  fineness  from 
what  has  been  the  ordinary  money  of  the  country.  In 
Japan  the  silver  yen  of  about  50  cents  gold  value  cor- 
responded to  the  silver  yen  worth  approximately  $1, 
which  had  been  issued  before  the  great  fall  in  silver.  In 
the  Philippines  and  in  Mexico  the  Mexican  silver  dollar, 
which  had  circulated  almost  from  the  discovery  of  Amer- 
ica, was  made  the  basis  of  the  new  unit  worth  50  cents, 
and  in  both  cases  the  old  coins  had  already  descended 
to  this  value,  and  for  a  brief  period  to  an  even  lower 
value.  Similarly,  in  Panama,  the  adoption  of  the  dollar 
as  a  50-cent  piece  was  in  recognition  of  a  coin  which  had 
circulated  widely  in  Colombia  when  Panama  was  a  part 
of  that  country  and  before  the  substitution  of  irredeem- 
able paper. 

In  all  these  cases  it  may  be  broadly  said  that  the  gold 
exchanges  were  taken  at  more  or  less  the  rate  of  the  day 
and  the  coins  were  unchanged.  As  silver  had  fallen  to 
about  half  its  former  gold  value,  this  involved  rating  the 
old  silver  dollar,  which  was  the  traditional  currency  of 
the  American  continent,  at  about  50  cents.  When  the 


44 

Indian  currency  was  reformed  the  gold  value  of  silver 
was  not  so  low  as  at  present,  and  for  reasons  not  perti- 
nent to  this  aspect  of  the  question,  it  was  considered 
proper  to  take  a  higher  rate  of  exchange  than  that  of  the 
day.  But  the  coin  in  principal  use,  the  rupee,  was  re- 
tained, its  bullion  value  being  at  the  ratio  of  22  to  1, 
instead  of  30  to  1,  for  the  reasons  stated. 

This  happy-go-lucky  plan  of  leaving  the  weight  and 
fineness  of  token  coins  unaltered,  the  consequences  of 
which  India  has  escaped  by  good  fortune  rather  than 
judgment,  has  met  with  retribution.  Japan,  Mexico  and 
the  Philippines  have  all  had  to  recoin  their  token  silver 
currency  at  higher  ratios  to  prevent  their  disappearance 
from  the  currency  when  silver  rose  over  its  face  value.* 

It  is  possible,  however,  to  escape  the  Scylla  of  putting 
too  much  intrinsic  value  into  silver  tokens,  only  to  fall 
into  the  Charybdis  of  putting  too  little,  and  so  offering 
an  irresistible  temptation  to  the  counterfeiter.  Coun- 
tries, however,  which  have  adhered  to  the  system  of  coin- 
age at  151/2  to  1,  or  16  to  1,  and  have  large  amounts  of 
coins  in  circulation  issued  at  these  ratios,  have  not  suf- 
fered from  his  efforts.  Amongst  them  are  Great  Britain^ 
France,  Germany,  Italy,  several  smaller  European  coun- 
tries, and  the  United  States.  Only  in  Spain  has  there 
been  serious  complaint  of  fraudulent  issues  of  silver  coins 
by  private  coiners.  In  British  India,  where  the  ratio  of 
22  to  1  affords  a  profit  of  about  35  per  cent,  upon  the 
fraudulent  issue  of  coins  of  full  value,  such  coinage  is 
rare  and  insignificant.  In  point  of  fact,  the  prevalence, 

*The  recoinage  of  the  Philippine  currency  would  not  have  been  necessary 
if  the  weight  and  fineness  originally  recommended  for  the  standard  coin 
had  been  adopted.  The  peso  proposed  was  of  25  grams,  0.835  fine,  which 
was  about  15  per  cent,  below  the  value  of  the  Mexican  unit,  which  was 
finally  adopted  by  Congress. — Vide  Special  Report  on  Coinage  and  Bank- 
ing in  the  Philippine  Islands  made  to  the  Secretary  of  War  November  25, 
1901,  pp.  21-22. 


45 

or  otherwise,  of  counterfeiting  depends  on  the  efficiency 
of  the  police  system  rather  than  the  bullion  value  of  the 
coins.  While  it  may  be  possible  to  produce  a  few  fraudu- 
lent coins  by  hand  labor,  on  the  part  of  jewellers  or 
others,  they  cannot  be  produced  in  commercial  quantities 
without  expensive  machinery.  Moreover,  when  produced, 
the  more  difficult  problem  arises  of  getting  them  into 
circulation.  If  issued  as  new  coins  from  a  single  source, 
they  can  usually  be  traced  to  their  origin  by  competent 
detectives;  while,  if  issued  at  different  points  in  small 
amounts,  the  cost  and  precautions  of  distribution  absorb 
a  large  proportion  of  the  profit  derived  from  the  opera- 
tion. 

The  subject  of  counterfeiting,  in  the  light  of  practical 
experience,  is  not  one  of  great  importance  from  a  strictly 
economic  point  of  view.  It  may  be  desirable,  upon  moral 
and  civic  grounds,  that  undue  temptation  should  not  be 
extended  by  the  coinage  laws  to  their  violation  and  eva- 
sion; but  the  amount  of  fraudulent  coinage  has  rarely 
in  any  country  borne  such  a  relation  to  the  entire  volume 
of  national  coinage  as  to  add  to  the  burden  of  redemp- 
tion or  alter  the  movement  of  the  exchanges  seriously. 

Addressing  ourselves  now  to  the  problem  as  it  arises 
in  Nicaragua,  in  the  light  of  these  observations,  it  is,  we 
think,  clear  that  the  question  of  the  coinage  ratio  comes 
down  to  a  narrow  point.  The  ratio  of  32  is  too  high, 
and  we  can  find  no  ground  for  believing  that  the  ratio 
of  15%  or  16  to  1  encourages  false  coming  materially, — 
more  than,  say  22  to  1, — the  truth  really  being  that  the 
prevalence  of  this  crime  (never  very  important)  depends 
more  upon  other  considerations.  There  are  few  good 
harbours  in  Nicaragua,  and  they  are,  as  regards  their 
imports,  under  the  close  supervision  of  the  customs  of- 
ficials. It  is,  therefore,  in  a  high  degree  unlikely  that 
such  smuggling  of  false  coin  can  be  effected,  and  it  is 


46 

certain  that  the  country  is  not  advanced  enough  to  intro- 
duce, equip  or  run  a  mint  clandestinely. 

Taking  all  these  matters  into  consideration,  we  have 
recommended  the  adoption,  with  a  slight  difference  in  the 
case  of  the  silver  dollar,  of  substantially  the  American 
ratio  of  coinage. 

In  Nicaragua  we  are  fortunate  in  having  on  the  West 
Coast  a  tabula  rasa.  It  has  no  monetary  traditions  that 
have  not  been  obscured  by  many  years'  experience  of 
irredeemable  paper;  and  there  are  no  silver  coins  cur- 
rent. For  some  time  past  retail  and  wholesale  dealers 
have  been  reckoning  in  gold,  the  custom  dues  are  col- 
lected a,t  a  fixed  gold  rate,  and  the  books  take  all  deposits 
in  gold  or  paper,  keeping  the  two  accounts  perfectly  dis- 
tinct, and  latterly  treating  the  paper  as  more  or  less 
useless  in  the  loan  market.  The  East  Coast  currency  is 
not  issued  under  the  sovereignty  of  Nicaragua,  but  im- 
ported and  controlled  by  the  few  large  business  houses  in 
Bluefields.  It  is  on  a  gold  basis  and  consists  of  silver 
coin  of  Latin  America  kept  by  these  firms  at  a  value  of 
from  40  to  42  cents  gold.  In  such  an  unsatisfactory  con- 
dition of  affairs  it  is  not  necessary  to  attach  much  weight 
to  any  possible  local  prejudice  against  receiving  silver 
coins  of  lower  'intrinsic  value  than  that  now  current. 
The  people  understand  the  matter  and  are  in  favor  of  a 
currency  based  on  the  dollar. 

XIX. — PRINCIPLES  OF  THE  NOTE  ISSUE. 

It  was  originally  intended  that  we  should  study  local 
conditions  on  the  spot  for  two  or  three  weeks,  and  then 
return  to  New  York  and  prepare  a  report,  after  consulta- 
tion with  you.  The  next  step  would  have  been  the  pres- 
entation by  you  of  a  currency  plan  to  Nicaragua  for 
passage  into  law.  Circumstances,  however,  arose  which 
made  this  sequence  of  events  impracticable,  if  not  im- 


47 

possible.  The  condition  of  Nicaragua's  current  finances 
was  desperate.  The  Treasury  was  empty  and  the  govern- 
ment was  near  the  end  of  its  resources.  The  government 
also  desired  a  rate  of  exchange  which  could  not  be  at- 
tained without  further  resources.  All  this  spelt  time  and 
delay,  for  it  was  necessary  to  examine  the  position  to 
see  how  much  more  was  required  on  Treasury  and  cur- 
rency account,  and  what  security  could  be  assigned. 
Meanwhile  Nicaragua  had  parted  with  the  control  of  its 
customs  and  the  revenues  therefrom,  and  the  bankers 
had  parted  with  the  moneys  which  they  had  agreed  to 
loan  Nicaragua,  but  which  could  not  be  released  under 
the  Treasury  Bills  Agreement  until  a  currency  plan  was 
agreed  upon  and  had  become  statute  law. 

In  these  circumstances,  it  was  decided  to  formulate 
the  currency  reform  in  detail  sufficient  to  admit  of  the 
proceeds  of  the  loan  becoming  available.  The  steps  al- 
ready taken,  in  pursuance  of  this  policy  and  the  reasons 
underlying  them,  have  already  been  set  forth.  The  act 
passed  in  accordance  with  our  recommendations  contem- 
plates a  paper  currency  based  upon  gold;  it  prescribes 
the  method  of  its  conversion  into  gold  and  from  gold  into 
paper;  it  deals  with  the  rate  of  exchange;  and  it  gives 
the  unit  of  value,  with  the  denominations,  nature,  weight 
and  fineness  of  the  metallic  currency.  No  reference,  how- 
ever, is  made  in  this  law  to  the  method  of  note  issue, 
nor  to  the  ultimate  profits  derivable  from  this  issue  or 
the  seigniorage  on  the  metallic  currency,  nor,  indeed,  to 
the  general  relations  between  the  National  Bank  and  the 
government. 

We  now  propose  to  take  up  in  order  three  points : 

1. — The  reason  for  not  advising  that  the  exchange 
standard  system  be  the  permanent  arrangement  for  Nic- 
aragua's currency. 


48 

2. — The  system  of  note  issue  which  we  recommend 
for  eventual  establishment. 

3. — The  financial  arrangements  between  the  bank  and 
government. 

XX. — LIMITATIONS  OF  THE  EXCHANGE  STANDAKD  SYSTEM. 

The  essence  of  the  exchange  standard  system  is  de- 
pendence upon  another  monetary  centre.  Java  leans  on 
Holland,  the  Philippines  on  the  United  States,  India 
upon  England.  Each  of  these  countries  has  a  token  cur- 
rency, provides  the  funds  requisite  to  support  its  parity, 
and  leaves  the  bulk  of  these  funds  in  the  richer  country. 

Nicaragua  is  a  sovereign  state.  Owing,  however,  to 
financial  exigencies,  it  has  sought  assistance  from  the 
American  bankers  until  such  time  as  it  may  be  in  a  fair 
way  to  discharge  its  obligations,  as  we  expect  it  will  be 
able  to  do  under  a  prudent  financial  policy.  During  this 
interval,  dependence  upon  the  creditor  country  is  not 
merely  reasonable,  but  economically  advantageous. 

It  may  be  questioned  whether  the  policy  is  wise  as 
a  permanent  arrangement.  It  economizes  the  use  of 
gold,  whereas  the  output  of  gold  has  been  growing  so 
enormously  of  late  years,  that  it  is  probably  more  to  the 
public  interest  to  extend  its  sphere  of  use  than  husband 
the  supply. 

Secondly,  the  tendency  in  the  world,  including  the 
United  States,  is  to  erect  the  fabric  of  money  and  credit 
on  a  small  base — on  an  inverted  pyramid,  as  it  were.  It 
would  be  better  for  the  world  at  large,  and  for  the 
guardian  country,  where  the  amount  involved  is  con- 
siderable, that  her  dependent  country  should  hold  its  own 
gold.  Objection  may  be  taken  that  earmarking  the  gold 
in  the  guardian  country  is  the  same  thing  and  more  eco- 
nomical. This  is  not  so.  The  presence  of  the  earmarked 


49 

gold  is  always  discounted,  and  the  temptation  is  very 
great  (in  the  case  of  India  it  has  been  found  irresistible) 
to  invest  it. 

If  India  held  about  twenty-five  millions  sterling  in 
hard  gold  in  India  instead  of  investing  the  same  in  the 
London  money  market,  there  is  not  the  smallest  question 
but  that  this  would  be  an  invaluable  bulwark  behind  the 
English  currency  system,  and  could  be  lent  temporarily 
as  a  matter  of  international  courtesy  to  Paris,  Berlin  or 
New  York  in  the  event  of  a  serious  monetary  crisis,  in 
addition  to  being  a  tower  of  strength  in  India. 

So  soon  as  gold  can  be  securely  held  against  revolu- 
tionary violence,  Nicaragua  would  be  more  independent 
holding  her  own  modest  reserve.  And  in  course  of  time 
it  might  be  useful.  The  mouse  can  sometimes  help  the 
lion  (perhaps  the  eagle  is  more  apposite  in  this  case). 
Nicaragua's  plan,  if  accepted,  may  be  followed,  making 
Central  American  currencies  an  assistance  instead  of  a 
responsibility  to  the  outside  world. 

Apart  from  the  temptation  to  skimp  the  store  of  hard 
gold,  exchange  standard  systems  have  been  subjected  to 
the.  reproach  of  being  state-managed  systems.  It  lies 
with  those  controlling  them  to  see  whether  at  one  time 
the  gold  reserve  is  sufficient,  and  at  others  whether  the 
token  money,  be  it  silver  or  paper,  is  sufficient.  For 
example,  in  India,  when  the  tide  of  business  is  rising,  the 
government  is  attacked  if  it  is  caught  short  of  silver, 
whereas  under  old-fashioned  automatic  systems,  the  bur- 
den of  estimating  the  need  for  currency  is  thrown  upon 
those  who  desire  to  employ  it,  viz.,  the  bankers.  It  lies 
with  them  when  they  desire  currency,  to  import  it,  while 
the  state  stands  aside,  merely  attaching  to  it  the  faculty 
of  legal  tender  and  certifying  to  its  genuineness  by 
stamping  the  metal  or  engraving  the  paper. 

Again,  under  an  exchange  standard,  there  is  but  one 


50 

line  of  defense, — the  reserve  fund;  whereas,  with  gold 
circulating  or  in  hoards,  there  are  two  more.  Before  the 
parity  established  is  broken,  the  gold  in  circulation  has 
to  be  exported,  and  the  gold  in  hoards  assists  to  righten 
the  situation,  so  soon  as  the  price  rises  high  enough  to 
tempt  the  holders  to  part  with  it. 

Lastly,  it  is  not  easy  to  graft  on  to  the  exchange  stand- 
ard system  a  coherent  scientific  method  of  note  issue. 

On  the  other  hand,  the  reverse  is  not  true.  If  an 
adequate  reserve  of  gold  be  provided  against  a  note  is- 
sue, there  is  nothing  to  prevent  a  portion  of  it  being  held 
abroad,  which  arrangement  is  the  salient  feature  of  the 
exchange  standard  system. 

XXI. — METHODS  OF  SECUBING  NOTES. 

Note  issues  in  the  past  have  been  secured  in  a  variety 
of  ways.  The  principal  methods  are  classified  below: 

(a)  Secured  by  bonds. 

(b)  Limited  by  the  capital  of  the  issuing  bank. 

(c)  Supported  by  general  assets. 

(d)  Specifically  secured  wholly  or  partly  by  cash. 

Few  will  be  found  to  defend  the  first,  for  bonds  have 
no  logical  connection  with  monetary  needs,  and  the  sys- 
tems have  had  their  origin  in  the  same  causes  which  have 
prompted  the  issue  of  inconvertible  paper,  namely,  the 
needs  of  the  government,  which  are  more  properly  met 
by  taxation.  The  second  possesses  also  the  defect  that 
the  amount  of  currency  is  not  determined  by  the  demand, 
but  by  the  capacity  of  the  supplier.  It  is,  however,  some- 
times strengthened,  as,  for  example,  in  Canada,  by  addi- 
tional safeguards  in  the  nature  of  a  general  pool  or  fund, 
and  works  well. 


51 

The  third  succeeds,  in  the  case  of  the  Bank  of  France, 
owing  to  the  excellent  traditions  and  judgment  of  what 
is  probably  the  best  governed  bank  in  the  world,  but  the 
success  is  due  to  conservative  prudence,  leading  the  di- 
rectors to  keep  even  a  larger  cash  reserve  than  is  usual 
under  hard  money  systems. 

The  fundamental  distinction  in  principle  between 
these  systems  reduces  itself  to  the  point  so  much  dis- 
cussed in  England  at  the  time  of  the  enactment  of  the 
Peel  Act  of  1844, — whether  the  paper  currency  shall  be 
specifically  secured  by  cash  (at  least  above  a  certain 
agreed  minimum  in  amount)  according  to  the  so-called 
"currency  principle, "  or  whether  it  shall  be  secured  by 
the  general  assets  of  the  bank,  with  such  a  proportion  of 
cash  on  hand  or  within  call  as  may  be  prescribed  by  stat- 
ute or  prudent  banking  policy,  according  to  the  so-called 
'  *  banking  principle. ' ' 

The  essential  distinction  between  the  two  schools  of 
thought  is  that  the  latter  regards  paper  currency  as  a 
medium  of  credit  of  the  same  nature  as  book  credits  and 
checks,  and  so  uses  it.  The  other  holds  that  paper  money 
is  like  metallic  money,  that  it  is  a  counter  and  has  no 
relation  to  credit.  Where  business  transactions  are 
numerous,  it  is  not  denied  that  more  counters  are  neces- 
sary, but  it  is  urged  that  the  amount  of  currency  issued, 
whether  metallic  or  paper,  should  be  solely  determined 
by  the  amount  required  for  such  transactions. 

It  is  impossible  within  the  scope  of  this  note  tantas 
componere  lites.  The  hard  money  system  has  the  merit 
of  detaching  currency  matters  entirely  from  the  compli- 
cations and  dangers  caused  by  over-trading  and  commer- 
cial crises,  whereas  it  has  the  defect  of  requiring  busi- 
ness to  have  recourse,  as  it  expands,  to  checks  and  book 
credits. 

The  whole  question  is  really  a  matter  of  custom,  tra- 


52 

dition  and  temperament,  but  we  feel  that  for  a  country, 
the  development  of  which  has  been  arrested  by  recent 
internal  disorders,  the  safer  and  simpler  course  is  to 
model  our  suggestions  on  the  lines  of  the  English,  Indian 
and  German  arrangements. 

The  English  system  of  issue  allows  the  first  eighteen 
millions  sterling  of  the  note  circulation  to  be  uncovered, 
whilst  anything  in  excess  of  this  amount  must  be  covered 
by  gold.  The  origin  of  the  fiduciary  part  of  the  circula- 
tion lies  mainly  in  an  old  debt  of  the  government  to  the 
bank,  whilst  a  portion  thereof  is  in  lieu  of  the  issues  of 
the  private  and  joint-stock  banks,  which,  under  the  Bank 
Act  of  1844,  forfeited  their  rights  of  issue  on  establish- 
ing offices  in  London.  The  Indian  system  follows  the 
spirit  of  the  English  system.  The  notes  are  issued  by 
the  state,  and  a  certain  quantity  are  covered  by  govern- 
ment commercial  paper-,  and  anything  in  excess  by  silver 
or  gold.  The  amount  covered  by  government  commer- 
cial paper  was  originally  80  millions  of  rupees;  but  it 
has  been  progressively  raised  by  legislation,  as  the  note 
issue  has  expanded,  until  it  is  now,  we  think,  120  millions. 

There  is  not  much  to  be  said  for  the  awkward  arrange- 
ment by  which  these  120  millions  are  actually  held  in  gov- 
ernment bonds.  Clearly,  it  would  be  simpler  and  equally 
effective,  if  this  double  entry  were  avoided  by  cancelling 
bonds  to  the  extent  of  120  millions.  They  are  a  state 
debt,  and  the  notes  are  a  state  liability.  The  only  argu- 
ment of  force  that  can  be  urged  in  favor  of  the  existing 
system  is  that  the  note  issue  department  can,  should  the 
metallic  reserve  run  out,  dispose  of  these  bonds  in  the 
market  piecemeal,  without  attracting  public  notice,  and 
without  the  issue  of  a  fresh  loan. 

The  German  system  has  been  modelled  on  English 
lines,  but  marks  a  great  advance  in  that  it  provides  for 
some  elasticity  of  issue. 


53 

The  entire  circulation  must  be  covered  as  to  one-third 
by  gold  and  as  to  two-thirds  by  bills  bearing  not  less  than 
two  signatures  and  maturing  within  three  months.  At 
the  end  of  each  week  the  total  circulation  is  ascertained, 
and  a  tax  at  the  rate  of  five  per  cent,  per  annum  is  levied 
on  the  amount  of  the  circulation  arrived  at  by  deducting 
from  the  total  circulation  the  holdings  of  gold  plus  a  fixed 
amount  of  550  millions  of  marks.  This  latter  amount  is 
termed  the  ' i  Kontingent "  and  has  a  historic  origin  very 
similar  to  that  of  the  uncovered  circulation  of  the  Bank 
of  England. 

The  German  system,  better  in  most  respects  than  the 
English,  ignores,  however,  what  is  really  at  the  base  of 
the  latter.  Although  the  uncovered  portion  of  the  Eng- 
lish issue  has  a  historic  origin, — the  Indian  being  some- 
what slavishly  modelled  upon  it, — its  real  justification, 
which  has  enabled  it  to  survive,  is  its  recognition  of  the 
fact  that  there  is  a  portion  of  the  note  circulation  which 
requires  no  specific  backing.  Opinions  may  differ  as  to 
the  exact  amount  of  the  note  issue  which  will  never  be 
tendered  for  encashment,  but  it  is  quite  certain  that  there 
is  a  point  below  which  it  can  never  fall. 

It  is,  we  believe,  as  certain  as  anything  can  be  in 
monetary  affairs,  that  in  a  country  of  which  the  main 
currency  is  paper,  the  public  will  in  no  circumstances 
tender  so  much  as  70  per  cent,  of  the  currency  for  en- 
cashment. We,  therefore,  in  our  project,  provide  that 
30  per  cent,  of  the  circulation  shall  be  entirely  fiduciary, 
and  we  believe  this  simple  provision  to  be  an  improve- 
ment on  both  the  English  and  German  systems.  We  think 
that  40  per  cent,  of  the  total  circulation  should  be  kept 
in  gold  as  against  the  statutory  provision  (33%  per 
cent.)  of  the  German  system,  and  for  the  remainder  it 
will  be  best  to  keep  bills  of  an  unimpeachable  character 
having  less  than  thirty  days  of  maturity  to  run. 


54 

For  greater  security  in  a  country  unfamiliar  under 
recent  conditions  with  monetary  orthodoxy,  we  recom- 
mend that  the  note  issue  department  be  completely  sep- 
arated from  the  ordinary  banking  business  of  the  Na- 
tional Bank.  Such  a  separation  has  its  drawbacks ;  but 
it  makes  for  clarity  of  thought  and  really  only  creates  a 
division  in  form  which  exists  in  fact. 

XXII. — PROVISIONS  FOE  OBTAINING  ELASTICITY. 

The  English  and  Indian  systems  are,  however,  too 
ironbound.  No  elasticity  exists  in  the  latter,  and  in  the 
former  it  can  only  be  obtained  by  the  clumsy  device  of 
suspending  the  Bank  Act.  The  German  system,  as  al- 
ready explained,  allows  further  issues,  but  stimulates 
their  retirement,  when  business  slackens,  by  a  tax. 

Unquestionably,  the  German  method  is  an  advance  on 
the  English,  but  it  has  a  defect  of  the  same  nature  as  that 
already  indicated.  That  is  to  say,  the  raison  d'etre  of 
an  extra  emission  is  that  more  counters  are  required  at 
certain  seasons,  this  being  particularly  true  in  countries 
dependent  on  agricultural  products,  the  movements  of 
which  have  to  be  financed.  In  other  words,  more  counters 
being  in  demand,  it  is  proper  and  safe  to  have  a  larger 
fiduciary  issue.  It  is  not  necessary  to  provide  more 
backing,  but  it  is  necessary  to  insure  the  retirement  of 
the  excess  issues,  when  the  tides  of  business  recede.  This 
is  properly  done,  as  in  Germany,  by  a  tax. 

We  therefore  recommend  that  the  Banking  Depart- 
ment may,  when  it  deems  it  advisable,  borrow  notes  from 
the  Currency  Department  to  the  extent  of  10  per  cent,  of 
the  note  circulation  then  outstanding,  on  penalty  of  pay- 
ing to  the  state  a  tax  equal  to  interest  on  such  extraor- 
dinary circulation  at  the  bank  rate  ruling  during  the 


55 

time  the  extraordinary  circulation  is  taken  out.  Before 
leaving  this  point,  we  would  draw  again  attention  to  the 
fact  that  the  gold  reserve  against  the  ordinary  circula- 
tion under  our  proposal  is  40  per  cent.,  as  against  the 
German  statutory  requirement  of  33%  per  cent.* 

Lastly,  we  think  that  some  provision  should  exist  to 
meet  grave  emergencies,  and  recommend  that  with  the 
consent  of  the  Minister  of  Finance  and  of  the  bank  di- 
rectors, a  further  10  per  cent,  of  uncovered  notes  may  be 
issued  by  the  Currency  Department  of  the  bank,  on  which 
notes  a  tax  shall  be  paid  to  the  state  at  a  rate  of  two 
per  cent,  per  annum  over  the  bank  rate  ruling  at  the  time 
the  notes  are  issued.  Neither  of  these  two  provisions 
for  elastic  issues,  each  of  10  per  cent.,  should  be  opera- 
tive until  after  the  note  reserve  has  attained  the  standard 
contemplated, — viz.,  a  cover  of  70  per  cent,  in  cash  and 
commercial  paper.  At  commencement  the  amount  of  gold 
or  credit  at  the  back  of  the  note  issue  (estimated  at  35 
million  pesos  on  p.  37  will  be  roughly  about  30 
per  cent.**  of  the  total  circulation,  whereas  we  con- 
sider that  the  cover  should  not  be  less  than  40  per  cent, 
in  gold  and  30  per  cent,  in  commercial  paper.  The  dif- 
ference will  be  accumulated  by  the  seigniorage  derived 
from  the  metallic  currency,  brokerage  commission  on  the 
sale  of  drafts,  and  the  gold  tendered  for  new  notes  in 
excess  of  the  existing  circulation.  All  this  will  take  time, 
and  it  is  conceivable  that  it  may  be  necessary  to  retire 
more  of  the  present  government  notes  than  we  have  es- 
timated for.  In  the  circumstances,  it  will  be  prudent  to 
strengthen  the  currency  reserve  if  funds  can  be  obtained 


*The  German  figure  is  really  lower  still,  for  it  counts  as  cash  Imperial 
Treasury  notes. 

**So  soon  as  the  silver  currency  now  being  coined  is  exchanged  for  the 
silver  currency  on  the  East  Coast,  the  amounts  so  realized  can  be  credited 
to  the  currency  reserve. 


56 

hereafter  from  surplus  collections  of  customs  revenue, 
or  moneys  accruing  from  the  larger  loan,  or  otherwise. 

XXIII. — LIABILITY  FOE  NOTES. 

The  question  arises  as  to  the  liability  for  the  note 
circulation.  At  present  it  lies  with  the  Republic  which 
has  issued  the  notes.  We  think  that  this  liability  should 
continue  until  a  reserve  of  70  per  cent,  against  the  cir- 
culation has  been  attained.  Thereafter  the  Bank,  in  con- 
sideration of  the  advantages  conferred  upon  it  by  the 
concession,  should,  during  the  period  of  the  concession, 
release  the  government  from  all  liability  regarding  the 
note  issues.  At  the  expiration  of  the  concession,  the  lia- 
bility of  the  government  should  revive  and  until  suffi- 
cient arrangements  are  made  to  provide  for  this  liability, 
the  concession  should  continue. 

Our  project,  when  fully  brought  into  effect,  contem- 
plates the  coinage  of  gold  on  demand,  the  encashment  of 
notes  in  gold  on  demand,  the  consequent  withdrawal  of 
the  faculty  of  legal  tender  from  bank-notes  when  tend- 
ered by  the  bank,  and  eventually  the  holding  of  the  gold 
reserve  of  the  currency  department  in  Nicaragua*  be- 
yond such  amounts  as  might  be  held  in  New  York, 
Jamaica,  London,  Paris  and  Berlin,  for  convenience  in 
carrying  on  exchange  operations.  Under  it  the  entire 
metallic  currency  of  the  country  (except  gold)  and  the 
notes  would  be  maintained  at  par  by  the  gold  and 
other  reserves  in  the  currency  department.  The  accounts 
therefore  of  all  these  should  be  kept  in  the  currency  de- 
partment, the  bullion  value  of  the  silver  and  token  cur- 
rencies being  entered  on  the  credit  side  as  an  asset. 

To  make  the  financial  aspect  of  our  proposals  clear, 


*It  may  be  held  at  branches  as  well  as  at  the  Managua  office,  where 
the  bulk  of  the  reserve  will  normally  be. 


57 

we  have  appended  to  this  report  several  tables.*  The 
first,  shows  the  amount  immediately  available  for  the 
reserve  from  the  Treasury  Bills  Agreement.  The  next 
gives  the  circulation  account  at  commencement.  The 
third  gives  it  at  completion.  The  fourth  and  fifth  show 
the  effect  of  a  decrease  and  an  increase  in  the  circulation, 
and  the  sixth  exhibits  the  fractional  currency  account. 

XXIV. — FINANCIAL  ARRANGEMENTS  WITH   THE   GOVERN- 
MENT. 

Before  discussing  the  financial  arrangements  to  be 
made  between  the  Eepublic  and  the  National  Bank,  we 
enumerate  the  principal  references  to  this  matter  in  the 
various  laws  which  are  here  relevant : 

Schedule  X,  Paragraph  5,  declares 

That  the  bank  is  to  be  the  instrument  of  the  note 
issue  and  the  coinage,  as  settled  by  the  monetary 
plan  approved  by  the  Eepublic,  and  says  that  a  com- 
pensation for  this  work  shall  be  agreed  upon. 

Schedule  C,  Article  6,  states 

(a)  That  the  bank  shall  be  the  government  bank- 
ers; 

(b)  That  it  shall  maintain  the  currency  plan; 

(c)  That  it  shall  have  the  exclusive  right  to  issue 
the  notes  issued  under  the  monetary  plan. 

Article  7  gives  the  bank 

(f)  General  right  to  issue  notes; 

(g)  A  preferential  right  to  coin,  if  coining  be 
undertaken ; 

(h)  The  right  to  tender  its  notes  to  government 
as  legal  tender. 


*Vide  Appendix  A,  p.  63. 


53 

Broadly  speaking,  and  apart  from  any  contractual  ar- 
rangements, we  think  the  cases  of  notes  and  metallic  cur- 
rency should  be  distinguished. 

The  minting  of  coin  in  all  countries,  so  far  as  we  are 
aware,  is  the  prerogative  of  the  state.  We  think,  there- 
fore, that  any  payment  made  to  the  bank  for  undertaking 
the  provision  of  coin  or  for  having  it  minted  should  be  in 
the  nature  of  an  agency  commission. 

Issues  of  bank-notes  stand  on  a  different  footing.  It 
is  generally  held  that  the  function  of  note  issue  is  better 
performed  by  corporations  than  by  the  government,  and 
therefore  that  the  franchise  of  issue  can  be  alienated  by 
the  government  under  suitable  conditions.  In  this  case 
it  is  contemplated  that  the  National  Bank  shall  have  the 
monopoly  of  issue.  Such  a  franchise  may  become  of 
peculiar  value  after  70  per  cent,  is  accumulated;  and 
equity,  therefore,  requiries  that  due  compensation  should 
be  made  besides  the  prescription  of  appropriate  safe- 
guards. We  have  kept  these  considerations  in  mind 
whilst  making  the  recommendations  hereafter  set  forth. 

For  the  sake  of  clear  thinking,  we  proceed  to  regard 
the  bank  as  an  independent  corporation.  It  starts  by 
being  wholly  a  government  institution,  and  your  firms 
may  acquire  a  controlling  interest,  but  in  the  future  no 
one  can  say  who  will  own  or  control  it.  As  regards  the 
metallic  and  paper  currencies,  we  recommend  that  for  the 
first  year  the  bank  be  repaid  the  out-of-pocket  expenses 
of  its  issue  department  (which  should  include  office  rent, 
and  clerical  staff,  but  no  pro  rata  charge  for  manage- 
ment), and  in  addition  that  the  bank  receive  a  commis- 
sion of  $20,000.  In  the  second  year  the  same  payment 
should  continue,  the  commission  being  reduced  to  $10,000. 

The  only  sources  from  which  these  payments  can  be 
defrayed  are  general  revenues  or  the  currency  exchange 
fund.  The  payments  should  be  made  out  of  general  rev- 


59 

enues,  or,  if  these  should  prove  insufficient,  out  of  the 
currency  fund.  We  are,  of  course,  acutely  aware,  and  so 
are  you,  that  this  fund  should  not  be  weakened,  but  if 
general  revenues  are  insufficient,  there  is  no  other  re- 
course open  except  the  currency  exchange  fund,  unless 
the  government  is  to  resort  to  borrowing.  These  pay- 
ments being  more  or  less  from  one  pocket  into  another, 
appear  somewhat  artificial,  but  they  should  be  exhibited, 
for  they  are  real  liabilities  of  this  monetary  reform. 

It  is,  moreover,  desirable  that  a  bank  should  start 
well,  for  success  is  vital  to  credit.  In  the  case  of  a  rail- 
way, it  is  held  permissible  during  construction  to  pay  in- 
terest out  of  capital,  and  in  this  case  we  think  the  bank 
may  fairly  be  credited  with  what  it  has  earned.  So  soon 
as  the  currency  system  attains  the  standard  set, — that  is 
to  say,  so  soon  as  the  notes  and  the  silver  cordobas  in 
circulation  are  covered  to  the  extent  of  70  per  cent,  by 
cash  and  commercial  paper, — there  will  be  a  profit  ac- 
cruing from  seigniorage  on  coin,  interest  on  commercial 
paper  held,  and  brokerage  on  the  sale  of  drafts.  We 
recommend  that  the  net  profit  be  divided  equally  between 
the  bank  and  the  government. 

As  regards  work  done  by  the  bank  in  the  banking  de- 
partment for  the  government,  at  headquarters  or  at 
branches,  we  recommend  that  all  out-of-pocket  expenses 
be  calculated  by  the  bank's  manager  and  charged  against 
the  general  revenues  of  the  Republic.  At  the  commence- 
ment, the  credit  balances  of  the  government  will  be  in- 
considerable, and  the  work  done  by  the  bank  will  be 
unremunerative  from  a  business  point  of  view.  Probably 
the  fairest  solution  of  the  question  will  be  for  the  bank  to 
receive  a  commission  on  the  larger  side  of  the  account, 
allowing  the  government  a  reasonable  rate  of  interest  if 
the  amount  of  the  balances  warrant.  The  whole  matter 


60 

of  the  financial  relations  between  the  bank  and  the  Re- 
public in  its  banking  department  should  be  reconsidered 
in  two  years,  if  circumstances  show  this  to  be  desirable. 

XX  V. — TBANSITION  TO  THE  NEW  MONEY. 

In  discussion  of  our  recommendations,  it  has  been 
urged  by  critics  that  the  transition  from  the  existing  state 
of  affairs  to  the  basis  we  have  recommended  will  be  dif- 
ficult; that  people  who  have  been  accustomed  to  be  paid 
in  pesos  will  resent  the  tender  of  a  few  centavos  as  an 
equivalent  of  a  peso.  One  suggestion  has  been  to  ex- 
tend the  period  of  transition  to  a  year.  Another  is  to 
coin  a  piece  equivalent  to  the  peso  and  call  it  the  peso, 
with  the  idea  that  it  will  die  a  natural  death  after  achiev- 
ing its  purpose.  A  third  is  to  over-print  the  peso  note. 
Personally,  we  believe  these  fears  are  overdrawn.  That 
monetary  reform  will  be  unpopular  we  are  fully  prepared 
for.  All  changes  which  affect  prices  hit  one  class  or  an- 
other. The  opposition  will  find  any  stick  good  enough 
to  belabor  the  party  in  power.  The  advent  of  external 
capital  and  the  larger  units  of  money  may  raise  the  cost 
of  living.  If  so,  this  will  be  only  of  temporary  effect, 
for  wages  and  salaries  will  in  time  respond.  On  the 
other  hand,  the  restriction  of  the  currency  (and  the  fall 
in  exchange)  works  in  the  direction  of  reducing  prices, 
and  we  have  already  pointed  out  that  labor  tends  to  gain. 
We  are  not  much  impressed,  nor  would  we  be  deterred, 
by  these  arguments.  The  masses  are  not  so  foolish  as 
their  critics  imagine.  The  tourist  who  thinks  he  can  best 
the  small  shopkeeper  in  a  bazaar  or  market  by  a  superior 
knowledge  of  exchange  variations  in  small  coin  quickly 
finds  out  his  mistake.  Still,  there  is  no  harm  in  taking 
a  precaution  which  may  be  of  value.  The  alteration 


61 

which  we  prefer  is  the  over-printing  crosswise  of  the 
existing  one-peso  note  with  the  legend  that  it  is  worth 
a  certain  proportion  of  a  cordoba  in  the  new  currency. 
Such  notes  might  be  allowed  to  remain  out  as  legal  tender 
for  twelve  months,  and  could  be  reissued  during  that 
time. 

Provision  is  made  by  Article  8  of  the  new  monetary 
law  for  a  period  of  transition  from  the  present  monetary 
system  to  the  new,  which  we  believe  to  be  entirely  suffi- 
cient for  the  people  to  adapt  themselves  to  the  new  money 
and  to  appreciate  the  alteration  in  the  value  of  the  stand- 
ard unit. 

Notice  has  already  been  given  by  the  passage  of  the 
law  of  March  20,  1912,  that  the  new  unit  is  to  come  into 
effect  as  soon  after  July  1st  next  as  preparations  can  be 
completed.  Time  will  be  necessary  to  have  the  designs 
of  the  coins  and  the  new  notes  finished,  to  prepare  the 
coinage  dies,  to  execute  the  work,  and  to  ship  the  new 
money  to  Nicaragua,  When  these  measures  have  been 
carried  out,  the  old  notes  will  have  a  definite  value  in. 
relation  to  the  new  notes,  and  both  will  have  a  definite 
value  in  gold. 

After  the  final  exchange  is  fixed,  a  period  of  six 
months  is  allowed,  during  which  both  the  old  and  the  new 
money  shall  be  received  at  custom  houses,  post-offices, 
and  in  payment  of  other  government  obligations.  Dur- 
ing this  time  both  the  new  money  and  the  old  will  be 
legal  tender  also  for  debts  between  individuals  at  the 
rates  which  have  been  fixed. 

If  there  should  be  for  a  time  a  preference  for  the 
small  units  of  the  old  money,  it  would  thus  be  possible  to 
use  it.  The  limitation  of  six  months  does  not  mean  that 
at  the  end  of  that  time  the  old  money  will  be  outlawed  or 
will  lose  its  value.  It  simply  means  that  it  will  not  be 
obligatory  after  that  time  to  accept  it  if  the  person  to 


62 

whom  it  is  presented  demands  the  new  money.  If  both 
sides  to  a  bargain  prefer  the  old  money,  there  is  no  re- 
striction upon  its  use.  Gradually,  however,  the  amount 
in  circulation  will  tend  to  dimmish,  as  the  National  Bank 
cancels  the  old  notes  which  are  received  and  the  people 
become  accustomed  to  the  general  use  of  the  new  money. 
It  is  not  proposed  in  any  case  or  at  any  time  to  re- 
pudiate the  old  money  or  to  refuse  to  redeem  it.  The 
only  difference  in  dealing  with  the  old  money  after  the 
prescribed  period  of  transition  will  be  that,  as  it  is  no 
longer  legal  tender,  it  will  be  received  only  at  the  Na- 
tional Bank  and  at  government  offices,  and  some  addi- 
tional formalities  may  be  prescribed  in  exchanging  it  for 
the  new  money  or  for  gold.  If  it  is  decided  by  the  gov- 
ernment, after  the  old  money  has  almost  completely  dis- 
appeared, to  impose  some  formalities  on  its  further  use, 
such  a  regulation  is  a  thing  of  the  distant  future  and  is 
not  a  part  of  the  monetary  plan  as  enacted  by  the  Na- 
tional Assembly  of  Nicaragua.  The  National  Bank  is 
not  given  any  power  by  the  monetary  plan  to  fix  any 
limit  of  time  upon  the  redemption  of  the  National  Trea- 
sury notes  at  the  legal  rate  of  exchange. 

F.  C.  HAEEISON, 
CHAELES  A.  CONANT. 

To 

MESSES.  BROWN  BROTHERS  &  Co. 

and 
J.   &   W.    SELIGMAK   &   Co. 


63 


APPENDICES. 

APPENDIX  "A." 
Tables  Accompanying  the  Report. 

i. — REVENUE  &  EXPENDITURES  ACCOUNT  OF  TREASURY  BILLS 

LOAN. 

Credit.                                                Debit. 
$1,500,000  Bank  capital $    100,000 

Coinage,  labor  and 
material  .$  120,000 

New  paper  cur- 
rency cost $  30,000 

Legal  and  expert's 
fees,  telegrams...$  70,000 

Agency  commis- 
sion of  Bank $  20,000 

Out  of  pocket  ex- 
penses of  Bank-.$  10,000 

Purchase  of  old 
notes  for  incin- 
eration   $  780,000 

Balance  amount 
carried  to  note 
reserve  $  370,000 


$1,500,000  $1,500,000 


64 

2. — CIRCULATION    ACCOUNT   AT    COMMENCEMENT. 

The  circulation  account  of  notes  and  silver  cordobas  will,  at 
commencement,  stand  thus : 

Assets.  Liabilities. 

30%  fiduciary  $  840,000  Notes     circulat- 

40%  gold $  870,000*  ing    35    million 

30%  com  mercial  pesos   . — $2,800,000 

paper  $      

Deficit  in  gold $  250,000 

Deficit    in    Com- 
mercial paper  ...$  840,000 


$2,800,000  $2,800,000 

3. — CIRCULATION  ACCOUNT  ON  COMPLETION  OF  THE  PLAN. 

When  the  system  is  complete  the  note  account  will  stand  thus, 
assuming  -the  same  circulation  for  the  sake  of  simplicity: 

Assets.  Liabilities. 

30%  fiduciary $   840,000          Notes  circulating...$2,8oo,ooo 

40%  gold 1,120,000 

30%    com  mercial 

oaoer  84.0.000 

f  U£S%,»  •v^f.VJVW 


$2,800,000  $2,800,000 


*As  a  matter  of  fact  this  figure  will  be  lower  by  the  amount,  if  any, 
appropriated  for  the  considerations  detailed  on  pages  58  and  59  of  this 
report. 

$870,000  is  arrived  at  thus: 

$370,000  being  the  balance  shown  in  Table  1,  plus  $500,000  provided  in 
the  form  of  a  credit  by  the  Supplementary  Loan. 

So  soon  as  silver  cordobas  are  issued  from  stock  they  become  value, 
and  the  amount  issued  should  be  entered  in  the  debit  side  and  their 
bullion  value  should  be  entered  as  an  asset  under  the  40%  head. 

If  any  silver  cordobas  have  been  issued  they  will  be  accounted  for  as 
stated  in  second  note  under  Table  2. 


65 

4. — EFFECT  OF  MOVEMENTS  ON  THE  ACCOUNTS. 
Let  us  suppose  that  there  is  a  demand  for  drafts  on  New 
York  and  800,000  dollars  of  notes  are  encashed.    The  circulation 
account  will  stand  thus: 

Assets.  Liabilities. 

30%    fiduciary   re-  Notes  circulating...$2,ooo,ooo 

duced  to $   600,000 

40%  cash  should 
be  $800,000,  but 
is  -  ^20,000 

\j         * 

30%    com  mercial 

paper  should  be 

$600,000,  but  is.~     840,000 
Deficit  is 240,000 


$2,000,000  $2,000,000 

Clearly  the  cash  reserve  needs  strengthening.  This  is  done 
as  soon  as  practicable  by  realizing  commercial  paper,  which  is 
in  excess  of  $240,000  and  which  is  daily  maturing.  Ultimately, 
on  the  assumption  that  the  circulation  remains  without  further 
change,  the  account  will  stand  thus: 

Assets.  Liabilities. 

30%  fiduciary .$   600,000          Notes  circulating...$2,ooo,ooo 

40%  cash 800,000 

30%    com  mercial 

paper  360,000 

Deficit  in  commer- 
cial paper  240,000 


$2,000,000  $2,000,000 

Now,  let  us  take  the  converse  case,  which  will  be  the  more 
frequent,  as  the  currency  is  bound  to  expand.  Let  us  assume  a 
demand  for  notes  to  the  extent  of  $800,000. 

Assets.  Liabilities. 

30%   fiduciary  $1,080,000          Notes  circulating...$3,6oo,ooo 

40%    cash    should  Add  surplus  cover     240,000 

be  $1,440,000, 

but  is  1,920,000 

com  mercial 
paper  should  be 
$1,080,000,  but  is  840,000 


$3,840,000  $3,840,000 


G6 

We  now  hold  more  cash  than  our  plan  requires  by  $480,000, 
and  less  commercial  paper  by  $240,000.  This  will  be  removed 
from  the  note  account  as  provided  in  our  scheme,  and  the  cir- 
culation account  will  be  as  follows: 

Assets.  Liabilities. 

30%  fiduciary $1,080,000          Notes  circulating. 43,600,000 

40%  cash 1,440,000 

30%    com  mercial 

paper  1,080,000 


$3,600,000  $3,600,000 

5. — THE  FRACTIONAL  COIN  ACCOUNT. 
The  fractional  coin  circulation  account  will  start  as  follows: 

Assets.  Liabilities. 

Bullion  values —  Fractional  silver $  233,000 

Silver  @   58^  Fractional  nickel 23,000 

(plus) $   88,000          Fractional  copper  ...       9,000 

Nickel   600 

Copper 2,000 

Deficit,  say 174,000 


Say  $  265,000  $265,000 


NOTE. — So  soon  as  the  fractional  currency  is  exchanged  for  existing 
metallic  currency  the  latter  becomes  an  asset,  which,  when  realized,  is 
credited  to  the  currency  reserve. 

APPENDIX  B. 

Address  to  the  President  of  the  Republic,  December  15, 

1911. 

Your  Excellency: 

It  is  with  especial  pleasure  that  we  come  here,  as  the 
guests  of  your  progressive  Republic,  to  aid  you  as  far  as 
lies  in  our  power  in  that  course  of  economic  development 
and  national  prosperity  upon  which  the  Eepublic  has  en- 
tered with  accelerated  steps  under  the  existing  patriotic 
and  constitutional  rule.  Cradled  in  the  same  love  of  lib- 
erty regulated  by  law,  the  nations  of  the  two  Americas, 
while  each  pursuing  its  own  high  mission  under  its  na- 


67 

tional  flag  and  in  harmony  with  the  principles  of  local 
independence,  are  the  heirs  of  a  common  heritage  of  lib- 
erty, progress,  and  glory.  We  come  here,  therefore,  with 
no  other  motive  than  as  servants  of  the  government  and 
people  of  Nicaragua  to  render  you  such  expert  service  as 
may  be  in  our  power,  as  it  would  be  rendered  by  experts 
in  any  other  field  of  human  endeavor,  and  as  you  have 
rendered  service  to  us  and  to  humanity  by  your  great 
national  resources  and  your  glorious  traditions  of  free- 
dom. While  we  regard  with  keen  and  friendly  interest, 
like  other  citizens  of  your  sister  Kepublic  of  the  North 
and  of  the  British  Empire,  your  development  along  the 
same  paths  of  liberty  arid  order  as  ourselves,  our 
purpose  in  Nicaragua  is  to  aid  you  in  giving  to 
your  country  a  monetary  system  which  shall  be  en- 
tirely your  own,  independent  of  that  of  other  sov- 
ereignties, and  which  will  enable  Nicaragua,  by  the 
assurance  of  monetary  stability  and  security,  to  attract 
for  the  development  of  her  rich  fields,  mines,  and  forests, 
the  foreign  capital  which  may  be  needed  to  supplement 
the  intelligent,  earnest  and  patriotic  activities  of  her  own 
people.  As  the  servants  of  Nicaragua,  therefore,  we  de- 
sire to  join  our  hands  with  those  of  your  own  citizens  in 
the  common  labor  of  upbuilding  the  economic  progress, 
the  peaceful  development  and  the  enduring  glory  of  your 
Eepublic. 

APPENDIX  C. 

The  Monetary  Law  of  March  20, 1912. 

1. — MESSAGE  OF  THE  PRESIDENT  TO  THE  NATIONAL  ASSEM- 
BLY, SUBMITTING  THE  MONETARY  PLAN. 

Managua,  February  29, 1912. 

The  Executive  being  under  the  moral  obligation  to 
maintain  the  rate  of  exchange  of  the  national  currency 
with  reference  to  American  gold  at  twelve  hundred  per 
cent.,  this  being  the  rate  officially  fixed  by  decree  of  the 
8th  June,  1911,  has  to  find  the  means  of  bringing  it 


63 

towards  that  rate  on  changing  our  present  circulation  for 
the  new  coinage,  as  specified  in  the  Plan  decreed  under 
the  advice  of  the  experts  Harrison  and  Conant,  who  were 
appointed  in  accordance  with  the  Loan  Agreement. 

The  Government  has  taken  this  decision  in  the  inter- 
ests of  the  majority  of  the  Nicaraguans,  and  with  due 
regard  to  the  commercial  requirements  of  the  country, 
inasmuch  as  all  commercial  operations  have  been  based 
on  the  Government's  promise  already  referred  to,  a  prom- 
ise which,  if  not  fulfilled,  would  cause  a  general  and 
profound  crisis  in  the  productive  resources  of  the  coun- 
try for  years  to  come. 

In  order  to  effect  the  change  of  currency  under  the 
favorable  conditions  I  have  mentioned,  it  will  be  indis- 
pensably necessary  to  increase  by  half  a  million  dollars 
gold  the  sum  set  apart  in  the  Treasury  Bills  Agreement 
for  that  object.  The  Government  therefore  has  used  its 
best  endeavors  to  obtain  said  amount,  in  order  to  apply 
it  exclusively  to  that  use.  With  this  end  in  view,  and 
being  under  the  urgent  necessity  of  readjusting  the  bal- 
ance between  the  receipts  and  the  expenditure,  which  has 
been  disturbed  owing  to  the  abnormal  state  in  which  the 
country  has  remained  for  so  many  years,  and  the  natural 
though  transitory  effects  of  the  very  same  contracts  en- 
tered into  as  a  remedy,  I  have  decided,  with  the  author- 
ization of  the  honorable  Assembly,  to  negotiate  with  the 
bankers  who  provided  the  general  loan,  a  supplementary 
loan  to  fill  the  two  very  urgent  needs  which  I  have  indi- 
cated. 

I  took  steps  in  that  direction  and  have  the  satisfac- 
tion to  inform  you  that  I  have  been  successful  in  obtain- 
ing the  indispensable  sums  on  the  terms  and  under  the 
conditions  set  forth  in  the  proposed  contract,  which  I  now 
submit  to  the  high  consideration  of  the  honorable  Assem- 
bly, with  the  hope  of  getting  its  authority  to  enter  defi- 
nitely into  this  contract  with  the  bankers,  Brown 
Brothers  and  Company  and  J.  &  W.  Seligman  and  Com- 
pany. *  *  * 


69 

I  therefore  ask  of  the  honorable  Assembly  authority 
to  agree  to  the  enclosed  contract. 
With  every  consideration, 

Yours  faithfully, 

(Signed)     ADOLFO  DIAZ. 

2. — LETTER  TRANSMITTING  THE  MONETARY  PLAN. 

Managua,  February  15,  1912. 
Dear  Sir: 

We  have  the  honor  to  transmit  to  you  herewith  the 
plan  of  currency  reform  provided  for  in  Article  8  of  the 
Treasury  Bills  Agreement  of  September  1st,  1911,  and  in 
the  fifth  paragraph  of  Schedule  X  attached  to  that  agree- 
ment. 

The  plan  as  presented  has  the  approval  of  the  bankers 
and  outlines  the  method  by  which  it  is  hoped  that  the 
currency  system  of  the  Eepublic  may  be  placed  upon  a 
stable  basis  and  the  circulating  money  of  the  country  be 
given  a  fixed  gold  value. 

The  plan  contemplates  putting  to  effective  use  the  pro- 
ceeds of  the  loan  of  $1,500,000  gold  made  under  the  Treas- 
ury Bills  Agreement.  This  loan  is  to  be  drawn  upon, 
first,  for  reducing  exchange,  and,  secondly,  for  constitut- 
ing a  reserve  against  the  notes  issued  through  the  Na- 
tional Bank  in  exchange  for  the  existing  national  cur- 
rency notes.  The  reserve  thus  provided  for  will  be  main- 
tained not  only  from  the  direct  proceeds  of  the  loan,  but 
from  funds  arising  from  profits  on  the  issue  of  silver 
coins  and  from  other  sources,  which  are  intended  to  raise 
its  amount  within  a  short  time  to  forty  per  cent,  of  the 
notes  outstanding. 

A  monetary  unit  is  proposed  called  the  cordoba,  in 
accordance  with  your  recommendations,  and  its  gold  con- 
tents are  fixed  at  the  same  amount  as  the  gold  dollar  of 
the  United  States,  which  has  so  long  been  the  standard  by 
which  the  paper  exchange  has  been  computed  in  Nic- 
aragua. Full  provision  is  made  also  for  silver  and  minor 
coins  and  for  the  free  coinage  of  gold  after  the  plan 
becomes  fully  operative. 


70 

The  Executive  is  authorized  to  pay  at  once  from  the 
proceeds  of  the  loan  made  under  the  Treasury  Bills  Agree- 
ment the  capital  necessary  to  put  the  National  Bank 
into  effective  operation,  and  the  President  of  the  Eepub- 
lic  is  authorized  to  make  an  agreement  with  the  bank,  by 
which  exchange  operations  may  be  begun  at  the  earliest 
possible  moment. 

Certain  details  have  been  left  to  agreement  between 
the  Executive  and  the  bankers,  in  order  that  the  plan  may 
be  put  into  effect  in  such  a  manner  as  to  meet  changing 
conditions  as  they  arise,  avoid  disturbance  to  business, 
and  give  to  the  Executive  power  to  exercise  his  authority 
for  the  protection  of  the  interests  of  the  Republic. 

The  full  powers  of  the  bank  are  to  be  exercised  under 
the  plan  both  for  the  maintenance  of  the  parity  of  the 
notes  and  for  the  extension  of  credit  to  the  commercial 
interests  of  the  Eepublic,  with  a  view  to  their  develop- 
ment upon  a  broader  scale  than  has  been  possible  under 
the  system  of  irredeemable  paper  issues  which  have  intro- 
duced such  continuous  perturbation  and  uncertainty  into 
the  making  of  contracts  and  the  carrying  o&  of  legitimate 
business. 

It  has  been  our  aim,  in  framing  the  new  plan,  not 
only  to  adhere  strictly  to  the  franchises  granted  to  the 
National  Bank  in  the  Treasury  Bills  Agreement,  but  also 
to  comply  with  several  specific  provisions  of  the  new 
constitution  of  the  Eepublic. 

With  the  assurance  of  our  highest  esteem,  we  have 
the  honor  to  be, 

Yours  very  respectfully, 

F.  C.  HAEEISON, 
CHAELES  A.  CONANT. 

DON  PEDEO  EAFABL  CUADBA, 
MINISTER  OF  FINANCE, 
MANAGUA. 


71 


3. — TEXT  OF  THE  LAW 

THE  NATIONAL  CONSTITU- 
ENT ASSEMBLY  Decrees,  that 
it  approves  the  decree  on  the 
Monetary  Conversion  issued 
by  the  Executive  Power  in 
Council  of  Ministers  on  the 
25th  February  of  the  current 
year  in  these  terms: 

Art.  i. — The  monetary  unit 
of  the  Republic  shall  be  the 
cordoba,  and  shall  contain  one 
gram,  672  milligrams  of  gold, 
nine-tenths  fine,  and  shall  be 
divisible  into  one  hundred 
equal  parts. 

Art.  2. — The  gold  coins  of 
the  Republic  shall  be  as  fol- 
lows: 

Ten  cordobas,  which  shall 
contain  16.72  grams  of  gold, 
nine-tenths  fine. 

Five  cordobas,  which  shall 
contain  8.36  grams  of  gold, 
nine-tenths  fine. 

Two  and  a  half  cordobas, 
which  shall  contain  4.18 
grams  of  gold,  nine-tenths 
fine. 

Art.  3. — The  silver  and 
minor  coins  of  the  Republic 
shall  be  as  follows: 

The  cordoba,  which  shall 
contain  25  grams  of  silver, 
nine-tenths  fine. 

The  half-cordoba,  which 
shall  contain  12^  grams  of 
silver,  eight-tenths  fine. 

The  quarter- cordoba,  which 


OF  MARCH  20,  1912. 

LA    ASEMBLEA    NACIONAL 

CONSTTTU  YENTE    decreta  I 

aprobar  el  decreto  que  sobre 
conversion  monetaria  dicto 
el  Poder  Ejecutivo,  en  Con- 
sejo  de  Ministros,  el  25  del 
Febrero  del  corriente  ano, 
en  estos  terminos : 

Art.  i° — La  Unidad  Mone- 
taria de  la  Republica  se  deno- 
minara  "Cordoba"  y  conten- 
dra un  gramo  y  seiscientos 
setenta  y  dos  miligramos  de 
oro  de  nueve  decimos  de  ley  y 
sera  divisible  en  cien  partes 
iguales. 

Art.  2° — Las  monedas  de 
oro  de  la  Republica  seran: 

Diez  Cordobas,  pieza  que 
contendra  16.72  gramos  de 
oro  de  nueve  decimos  de  ley. 

Cinco  Cordobas,  pieza  que 
contendra  8.36  gramos  de  oro 
de  nueve  decimos  de  ley. 

Dos  y  Medio  Cor  dob  as t 
pieza  que  contendra  4.18 
gramos  de  oro  de  nueve 
decimos  de  ley. 

Art.  3° — Las  monedas  de 
plata  y  las  menores  de  la 
Republica  seran : 

El  Cordoba,  que  contendra 
veinticinco  gramos  de  plata  de 
nueve  decimos  de  ley. 

El  Medio  Cordoba,  que 
contendra  doce  y  m  e  d  i  o 
gramos  de  plata  de  ocho 
decimos  de  ley. 

El  Cuarto  de  Cordoba,  que 


72 


shall  contain  6%  grams  of  sil- 
ver, eight-tenths  fine. 

Ten  centavos,  which  shall 
contain  2l/2  grams  of  silver, 
eight-tenths  fine. 

Five  centavos,  which  shall 
be  of  the  weight  of  five  grams, 
of  which  75  parts  shall  be  of 
copper  and  25  parts  of  nickel. 

One  centavo,  which  shall 
be  of  the  weight  of  four 
grams,  of  which  95  parts  shall 
be  of  copper  and  five  parts 
of  zinc. 

One -half  centavo,  which 
shall  be  of  the  weight  of  two 
and  one-half  grams,  of  which 
95  parts  shall  be  of  copper  and 
five  parts  of  zinc. 

Art.  4. — The  amount  of 
the  coinage  of  both  gold  and 
silver  shall  be  determined  by 
the  National  Bank,  under 
regulations  approved  by  the 
Executive ;  provided,  that  ar- 
rangements may  be  made 
whenever  it  seems  proper 
and  desirable,  by  agreement 
between  the  Executive  and 
the  National  Bank,  for  the 
unlimited  coinage  of  gold. 

Art.  5. — The  tolerance,  or 
allowance  for  wear,  of  all  the 
coins  of  the  Republic  shall 
be  determined  by  Executive 
decree. 


contendra  seis  y  un  cuarto 
gramos  de  plata  de  ocho  deci- 
mos  de  ley. 

Dies  Centavos,  pieza  que 
contendra  dos  y  medio  gramos 
de  plata  de  ocho  decimos  de 
ley. 

Cinco  Centavos,  pieza  que 
t  e  n  d  r  a  el  peso  de  cinco 
gramos,  de  los  cuales  75 
partes  seran  de  cobre  y  25 
partes  de  nickel. 

Un  Centavo,  pieza  que 
tendra  el  peso  de  cuatro  gra- 
mos, de  los  cuales  95  partes 
seran  de  cobre  y  5  partes  de 
zinc. 

La  pieza  de  Medio  Centavo, 
tendra  el  peso  de  dos  y  medio 
gramos,  de  los  cuales  95 
partes  seran  de  cobre  y  5 
partes  de  zinc. 

Art.  4° — La  cantidad  acu- 
fiada  de  moneda  de  oro  y  plata 
sera  determinada  por  el  Banco 
Nacional  bajo  reglamentos 
aprobados  por  el  Ejecutivo, 
con  tal  que  en  cualquier 
tiempo  que  se  juzgue  opor- 
tuno  se  pueda  establecer  por 
convenio  entre  el  Ejecutivo  y 
el  Banco  Nacional  la  acuna- 
cion  ilimitada  del  oro. 

Art.  5° — La  tolerancia  6 
concesion  al  piiblico,  por  el 
clesgaste  de  todas  las  monedas 
de  la  Republica,  sera  deter- 
minada por  decreto  que  dara 
el  Ejecutivo. 


73 


Art.  6. — T  h  e  National 
Bank  shall  have  and  exer- 
cise all  the  powers  granted 
in  the  banking  concession, 
attached  as  Schedule  "C,"  to 
the  Trust  and  Fiscal  Agency 
Contract  entered  into  be- 
tween the  Republic  of  Nic- 
aragua and  Messrs.  Brown 
Brothers  &  Company  and  J. 
&  W.  Seligman  &  Company, 
of  New  York,  on  September 
i,  1911,  as  modified  by  the 
Treasury  Bills  Agreement 
of  the  same  date. 

Art.  7. — The  Minister  of 
Finance  shall  subscribe,  on  be- 
half of  the  Government  of 
Nicaragua,  a  sum  not  exceed- 
ing $500,000  of  the  capital  of 
the  National  Bank  of  Nicara- 
gua, authorized  by  the  Treas- 
ury Bills  Agreement  between 
the  Republic  and  Brown 
Brothers  &  Company  and  J. 
&  W.  Seligman  &  Company, 
of  New  York,  dated  Septem- 
ber I,  1911,  and  shall  pay,  in 
accordance  with  said  agree- 
ment, such  subscription  from 
the  proceeds  of  the  loan 
provided  for  in  said  agree- 
ment. 

Art.  8.— The  President  of 
the  Republic  is  authorized  to 
arrange  with  the  bankers 
named  as  parties  in  said 
Treasury  Bills  Agreement 
for  the  exchange,  on  or  before 


Art.  6°— El  Banco  Nacio- 
nal  tendra  y  ejercera  todos  los 
poderes  estipulados  en  la  con- 
cesion  bancaria  que  forma  el 
Anexo  C  del  Contrato  del 
Trust  y  Agencia  Fiscal  cele- 
brado  entre  la  Republica  de 
Nicaragua  y  Brown  Brothers 
&  C°  y  J.  &  \y.  Seligman  & 
C°,  de  New  York,  el  pri- 
mero  de  Setiembre  de  1911, 
con  las  modificaciones  del 
"Convenio  sobre  Cedulas  del 
Erario"  de  la  misma  fecha. 

Art.  7°— El  Ministro  de 
Hacienda  suscribira  por  cu- 
enta  del  Gobierno  de  Nicar- 
agua una  cantidad  que  no 
exceda  de  quinientos  mil  pesos 
($500,000.00)  del  capital  del 
Banco  Nacional  de  Nicaragua 
autorizado  por  el  "Convenio 
sobre  Cedulas  del  Erario" 
entre  la  Republica  y  Brown 
Brothers  &  C°  y  J.  &  W. 
Seligman  &  C°  de  Nueva 
York,  el  i°  de  Setiem- 
bre de  1911,  y  de  conformidad 
con  dicho  Convenio  pagara  la 
suscripcion  con  el  producto 
del  emprestito  estipulado  en  el 
mismo  Convenio. 

Art.  8°— Se  autoriza  al 
Presidente  de  la  Republica 
para  arreglar  con  los  ban- 
queros  nominados  como  partes 
en  dicho  "Convenio  sobre 
Cedulas  del  Erario,"  el  cam- 


July  i,  1912,  or  with  the  ap- 
proval of  the  bankers  at  a 
later  date,  if  deemed  proper, 
of  the  national  currency  of 
Nicaragua  for  notes  of  the 
bank,  at  a  rate  to  be 
agreed  upon  by  the  Presi- 
dent and  the  bankers  and 
officially  declared  not  less 
than  three  weeks  prior  to  the 
date  agreed  upon,  and  in  no 
event  to  be  higher  than  fif- 
teen hundred  pesos  in  na- 
tional currency  notes  for  each 
one  hundred  cordobas. 


Art.  9. — The  present  cur- 
rency plan  is  hereby  de- 
clared to  be  the  plan  referred 
to  in  Article  8  of  the  Treas- 
ury Bills  Agreement  of  Sep- 
tember i,  1911,  between  the 
Republic  and  Brown  Broth- 
ers &  Company  and  J.  &  W. 
Seligman  &  Company,  as 
bankers. 

In  accordance  with  the 
provisions  of  that  agreement 
the  Minister  of  Finance  is 
hereby  authorized,  with  the 
approval  of  said  bankers,  to 
order  the  United  States 
Mortgage  &  Trust  Com- 
pany, as  trustee,  to  pay  over 
or  set  aside,  in  whole  or  in 
part,  as  may  become  neces- 
sary, the  moneys  now  in  the 
hands  of  said  trustee  as  said 
Minister  of  Finance,  with 


bio  de  los  billetes  nacionales  y 
monedas  de  Nicaragua  por 
billetes  del  Banco,  dentro  de 
un  plazo  que  expire  el  i°  de 
Julio  de  1912,  6  con  la  apro- 
bacion  de  los  banqueros  en 
una  fecha  posterior  si  se  juzga 
conveniente,  a  un  tipo  que 
fijaran  de  comun  acuerdo  el 
Presidente  y  los  Banqueros,  el 
cual  sera  oficialmente  declar- 
ado  por  lo  menos  tres  semanas 
antes  de  la  fecha  que  se  con- 
venga ;  no  pudiendo  en  ningun 
caso  este  tipo  ser  mayor  que  el 
de  mil  quinientos  pesos  en 
billetes  nacionales  por  cada 
Cien  Cordobas. 

Art.  9° — Se  declara  que  el 
presente  Plan  Monetario  es  el 
senalado  en  el  articulo  8  del 
"Convenio  sobre  Cedulas  del 
Erario"  del  i°  de  Setiembre 
de  1911,  entre  la  Republica  y 
los  Banqueros  Brown  Broth- 
ers &  C°  y  J.  &  W.  Seligman 
&  C°. 

De  acuerdo  con  los  precep- 
tos  del  referido  Convenio,  se 
autoriza  por  la  presente  ley  al 
Ministro  de  Hacienda  para 
que,  con  la  aprobacion  de 
dichos  Banqueros,  ordene  a 
la  United  States  Mortgage 
and  Trust  C°,  como  fidei- 
comisario  pagar  6  apartar 
bien  sea  por  el  total  6  por 
partes  a  medida  que  sea 
necesario,  el  dinero  que  esta 
ahora  en  manos  del  fideicomi- 


75 


the  approval  of  the  bankers, 
may  determine. 

The  moneys  thus  paid 
over  or  set  aside,  together 
with  any  addition  or  increment 
thereto,  shall  constitute  a 
fund  to  be  called  the  Ex- 
change Fund,  which  may  be 
hereafter  made  a  part  of  the 
reserve  held  against  the 
notes  of  the  National  Bank. 
Said  Exchange  Fund  shall 
be  available  and  used  for  the 
following  purposes: 


First. — To  exchange  on 
demand  for  the  gold  coin  of 
Nicaragua  and  the  notes  of 
the  National  Bank  of  Nic- 
aragua, in  sums  of  not  less 
than  five  thousand  cordobas, 
or  the  equivalent  thereof  in  the 
money  of  the  United  States, 
at  the  principal  office  of  said 
National  Bank  in  Nicaragua, 
or  at  such  branch  offices  of 
the  bank  as  may  be  desig- 
nated for  the  purpose,  with 
the  approval  of  the  Minister 
of  Finance,  drafts  on  the 
said  Exchange  Fund  in  the 
United  States  or  other  for- 
eign country,  charging  a  pre- 
mium of  one-half  of  one  per 
cent,  for  sight  drafts  and  one 
per  cent,  for  telegraphic  trans- 
fers. 


sario  y  que  el  Ministro  de 
Hacienda,  con  la  aprobacion 
de  los  Banqueros,  determine. 

El  dinero  que  asi  se  pague 
6  se  aparte,  junto  con  cual- 
quiera  nueva  agregacion  6  in- 
cremento   que   reciba,   consti- 
tuira  un  fondo  que  se  llamara 
"Fondo  de  Conversion"  y  que 
podra  en  lo  sucesivo  formar 
parte  del  fondo  que  manten- 
dra  el  Banco  Nacional  para 
garantia  de  sus  billetes.     Este 
fondo  de  Conversion  sera  dis- 
ponible  y  sera  usado  para  los 
fines  siguientes: 
i°  Para  cambiar  a  su  presen- 
tacion  por  moneda  de  oro 
de  Nicaragua  y  los  billetes 
del    Banco    Nacional    de 
Nicaragua,    en   cantidades 
no  menores  de  cinco  mil 
Cordobas  6  en  su  equiva- 
lente  en  el  dinero  de  los 
Estados  Unidos  de  Ame- 
rica, en  la  oficina  principal 
del     Banco    Nacional    ^n 
Nicaragua  6  en  las  sucur- 
sales  del  Banco  que  para 
tal  fin  se  deslgnen,  con  la 
aprobacion  del  Ministro  de 
Hacienda,  giros  sobre  di- 
cho   fondo   de   cambio  en 
los     Estados     Unidos     u 
otro   pais   extranjero,   co- 
brandose    un    premio    del 
medio  por  ciento  por  los 
giros  a  la  presentation  y 
del    uno    por    ciento    por 
trasmisiones  telegraficas. 


76 


Second. — To  exchange  on 
demand  for  the  currency  of 
the  United  States,  or  of  any 
other  foreign  country  in 
which  a  part  of  said  Ex- 
change Fund  may  be  depos- 
ited, in  sums  of  not  less  than 
five  thousand  cordobas,  or  the 
equivalent  thereof  in  such  for- 
eign currencies,  drafts  on  the 
National  Bank  of  Nicaragua 
or  upon  such  branch  offices 
of  the  bank  as  may  be  desig- 
nated by  said  bank  for  the 
purpose,  with  the  approval 
of  the  Minister  of  Finance, 
charging  a  premium  of  half 
of  one  per  cent,  for  sight 
drafts  and  one  per  cent,  for 
telegraphic  transfers. 

Third. — To  make  exchanges 
between  the  notes  of  the 
National  Bank,  the  gold  or 
silver  coin  of  the  Republic, 
the  currency  of  the  United 
States,  and  other  foreign  cur- 
rencies, under  regulations  to 
be  made  for  that  purpose  by 
the  National  Bank,  subject  to 
the  approval  of  the  Minister 
of  Finance. 

The  premiums  charged  for 
drafts  and  telegraphic  trans- 
fers under  this  article  may  be 
temporarily  inci  eased  or  de- 
creased by  the  National  Bank 
or  by  the  custodians  of  the 
Exchange  Fund,  under  the 
direction  of  the  National 


2°  Para  cambiar  a  su  presen- 
tacion  por  dinero  de  los 
Estados  Unidos  6  de  otros 
paises  extranjeros  donde 
haya  depositado  parte  de 
dicho  fondo  de  cambio,  en 
cantidades  no  menores  de 
cinco  mil  Cordobas,  6  su 
equivalente  en  el  dinero  de 
dichos  paises,  giros  sobre 
el  Banco  Nacional  de  Nic- 
aragua 6  sobre  las  sucur- 
sales  del  Banco  que  este 
mismo  designe  para  tal  fin 
con  la  aprobacion  del  Min- 
istro  de  Hacienda,  cobran- 
dose  tin  premio  del  medio 
por  ciento  por  giros  a  la 
presentacion  y  del  uno  por 
ciento  por  trasmisiones 
telegraficas. 

3°  Verificar  cambios  entre  los 
billetes  del  Banco  Nacion- 
al, la  moneda  de  oro  6  de 
plata  de  la  Republica,  el 
medio  circulante  de  los 
Estados  Unidos  y  las 
demas  monedas  extran- 
jeras  conforme  a  los  regla- 
mentos  que  al  efecto  estab- 
lecera  el  Banco  Nacional 
con  la  aprobacion  del  Min- 
istro  de  Hacienda. 

Los  premios  que  se  cobren 
por  los  giros  y  trasmisiones 
telegraficas  de  acuerdo  con 
este  articulo,  pueden  temporal- 
mente  ser  aumentados  6  dis- 
minuidos  por  el  Banco  Na- 
cional 6  por  los  custodies  del 
Fondo  de  Conversion,  bajo  la 


77 


Bank,  and  may  be  different 
between  different  points ;  but 
they  shall  in  no  case  be  fixed 
higher  than  one  and  one- 
quarter  per  cent,  for  sight 
drafts,  nor  one  and  three- 
quarters  per  cent,  for  telegra- 
phic transfers,  except  with  the 
approval  of  the  Minister  of 
Finance. 

The  exchanges  above  pro- 
vided for  may  be  made  pro- 
visionally for  and  with  the 
existing  national  currency 
notes  of  the  Republic,  until 
such  date  as  may  be  fixed  un- 
der Article  14  of  this  Act  for 
the  termination  of  the  legal 
tender  quality  of  such  notes 
and  at  rates  of  exchange  to  be 
fixed  from  time  to  time  by  the 
Minister  of  Finance,  with  the 
approval  of  the  bankers  or 
their  representatives. 

The  amounts  received  as 
premiums  from  the  sale  of 
drafts  or  transfers  shall  be 
carried  to  the  credit  of  the 
fund  herein  provided  for, 
which  shall  bear  the  cost  of 
such  drafts  and  transfers. 

Any  drafts  against  said 
fund,  and  any  orders  for  pay- 
ments therefrom,  when  drawn 
and  signed  by  the  National 
Bank  of  Nicaragua,  Incorpo- 
rated, shall  be  paid  out  of  said 
fund  by  the  depositary  or  cus- 
todian thereof.  Such  drafts 
or  orders  shall  provisionally, 


direccion  del  Banco  Nacional 
y  pueden  ser  distintos  entre 
diferentes  lugares;  pero  en 
ningun  caso  seran  fijados  mas 
altos  que  el  uno  y  cuarto  por 
ciento  por  giros  a  la  presen- 
tacion,  ni  el  uno  y  tres  cuartos 
por  ciento  por  trasmisiones 
telegraficas,  excepto  con  la 
aprobacion  del  Ministro  de 
Hacienda. 

Los  c  a  m  b  i  o  s  referidos 
pueden  hacerse  provisional- 
mente  con  los  actuales  billetes 
nacionales,  hasta  la  fecha  que 
se  senala  bajo  el  articulo  14  de 
esta  ley  para  que  dejen  de 
tener  curso  legal  dichos  bil- 
letes, y  al  tipo  de  cambio  que 
en  su  oportunidad  el  Ministro 
de  Hacienda  fije,  con  la  apro- 
bacion de  los  banqueros  6  su 
representante. 


Las  cantidades  que  se  reci- 
ban  en  concepto  de  premios 
por  la  venta  de  giros  6  tras- 
misiones, seran  abonadas  a 
favor  del  fondo  provisto  por 
este  articulo,  del  cual  fondo 
sera  pagado  el  costo  de  los 
referidos  giros  y  trasmisiones. 

Todo  giro  y  orden  de  pago 
contra  dicho  fondo,  si  es  emiti- 
do  y  firmado  por  el  Banco 
Nacional  de  Nicaragua,  In- 
corporado,  sera  pagado  de 
dicho  fondo  por  el  depositario 
6  custodio  del  mismo.  Provi- 
sionalmente  y  mientras  se  abre 
el  Banco  en  Managua,  tales 


78 


until  the  bank  shall  be  opened 
for  business  in  Managua,  be 
drawn  and  signed  by  the  Min- 
ister of  Finance,  and  shall  be 
valid  when  approved  by  the 
bankers  or  their  representa- 
tives. 

All  of  the  drafts  or  orders 
referred  to  in  this  article  shall 
be  sufficient  warrant  to  such 
depositary  or  custodian  for  the 
payments  therein  called  for. 


Art.  10. — Neither  the  gov- 
ernment, nor  any  other  per- 
son, firm  or  corporation,  ex- 
cept the  National  Bank,  shall, 
during  the  term  of  the  charter 
of  said  bank,  be  permitted  to 
issue  paper  currency  or  any 
other  form  of  obligation  pay- 
able to  bearer  and  capable  of 
being  used  for  circulation  as 
money. 

Art.  ii. — The  gold  coin  of 
the  Republic,  the  silver  cor- 
dobas,  and  the  notes  of  the 
National  Bank  shall  be  re- 
ceivable for  customs  and  other 
public  dues  and  shall  be  legal 
tender  in  the  payment  of  debts 
within  the  Republic. 

The  subsidiary  silver  and 
the  minor  coins  of  the  Repub- 
lic shall  be  legal  tender  to  an 
amount  not  exceeding  ten 
cordobas. 

Art.  12. — The  importation 
of  foreign  coin  shall  be  sub- 


giros  u  ordenes  seran  emitidos 
y  firmados  por  el  Ministro  de 
Hacienda  y  seran  validos  cu- 
ando  scan  aprobados  por  los 
banqueros  6  sus  represen- 
tantes. 

Todos  los  giros  u  ordenes  a 
que  se  hace  referencia  en  este 
articulo  seran  autorizacion 
suficiente  al  depositario  6  cus- 
todio  para  hacer  los  pagos 
solicitados  en  tales  giros  u 
ordenes. 

Art.  10 — Ni  el  Gobierno  ni 
ninguna  otra  persona,  casa  6 
corporacion,  excepto  el  Banco 
Nacional  podra  emitir  durante 
el  periodo  del  contrato  de 
dicho  Banco,  papel  moneda  6 
cualquier  otra  forma  de  obli- 
gaciones  pagadera  al  portador 
y  capaz  de  servir  para  la  cir- 
culacion  como  moneda. 

Art.  ii — La  moneda  de  oro 
de  la  Republica,  los  Cordobas 
de  plata  y  los  billetes  del  Banco 
Nacional,  seran  recibidos  en 
pago  de  los  derechos  aduane- 
ros  y  fiscales,  y  seran  de  curso 
legal  y  obligatorio  para  el 
pago  de  deudas  dentro  de  la 
Republica. 

Las  monedas  subsidiarias  de 
plata  y  las  menores  de  la 
Republica  seran  de  curso  legal 
obligatorio  hasta  una  cantidad 
que  no  exceda  de  diez  Cordo- 
bas. 

Art.  12 — El  Ejecutivo  reg- 
lamentara  por  decreto  la  im- 


79 


ject  to  the  control  of  the  Ex- 
ecutive, exercised  by  decree. 

Art.  13. — The  circulation  of 
foreign  currencies,  whether  of 
paper  or  of  gold,  silver  or 
other  metals,  may  be  per- 
mitted or  prohibited  by  Ex- 
ecutive decree. 

Art.  14. — Six  months  after 
the  official  rate  of  exchange 
provided  for  in  Art.  8  of  this 
Act  comes  into  operation,  the 
National  Bank  then  being 
ready  to  issue  its  notes  in  ex- 
change for  the  national  cur- 
rency and  coins,  the  latter  cur- 
rency and  coins  shall  no 
longer  be  received  for  customs 
or  other  public  dues  or  be 
legal  tender.  The  currency 
and  coins  remaining  in  circu- 
lation after  this  date — forged 
or  altered  notes  excepted — 
may  be  redeemed  under  spe- 
cial regulations  approved  by 
the  National  Bank  and  the 
Executive. 


Art.  15. — The  Executive 
may  take  any  measures  neces- 
sary and  proper  for  carrying 
out  the  provisions  of  this  act 
and  the  provisions  of  the 
Treasury  Bills  Agreement 
dated  September  I,  1911,  and 
subsequent  amendments  there- 
to, and  to  enable  the  National 
Bank  and  the  bankers  parties 
to  that  agreement  to  better 


portacion  de  monedas  extran- 
jeras. 

Art.  13 — El  Ejecutivo  podra 
prohibir  6  permitir  por  decre- 
to  la  circulacion  de  monedas 
extranjeras,  scan  estas  de 
papel,  oro,  plata  u  otros 
metales. 

Art.  14 — Seis  meses  des- 
pues  que  empiece  a  regir  el 
tipo  oficial  de  cambio  con- 
forme  lo  dispuesto  en  al  arti- 
culo  8  de  esta  ley,  y  estando  el 
Banco  Nacional  listo  para 
redimir  con  sus  billetes  los  del 
Tesoro  Nacional  y  las  mone- 
das de  Nicaragua,  estos  bi- 
lletes del  Tesoro  y  monedas  ya 
no  seran  recibidos  en  pago  de 
los  derechos  aduaneros  ni  fis- 
cales,  ni  seran  de  curso  legal. 
Los  billetes  y  monedas  que 
despues  de  esta  fecha  queden 
en  circulacion,  podran  cam- 
biarse  (excepto  los  que  esten 
alterados  6  sean  falsifica- 
ciones)  previas  formalidades 
especiales  que  aprobaran  el 
Banco  Nacional  y  el  Ejecu- 
tivo. 

Art.  15 — Podra  el  Ejecu- 
tivo dictar  todas  las  medidas 
necesarias  y  convenientes  para 
el  cumplimiento  de  las  disposi- 
ciones  de  esta  ley  y  de  las  del 
Convenio  sobre  Cedulas  del 
Erario,  fechado  el  i°  de 
setiembre  de  1911,  con  sus 
reformas  subsigtiientes,  y 
para  facilitar  al  Banco  Na- 
cional y  a  los  Banqueros,  que 


perform  any  or  all  the  func- 
tions therein  conferred  upon 
them  and  to  restore  and  main- 
tain the  stability  of  the  na- 
tional monetary  system;  the 
measures  taken  in  this  con- 
nection by  the  Executive  to 
have  legal  effect  provided  they 
be  not  inconsistent  with  the 
present  law. 

Art.  1 6. — The  counterfeit- 
ing of  the  notes  of  the  Na- 
tional Bank  shall  be  subject  to 
the  penalties  which  are  pro- 
vided by  the  laws  relative  to 
the  counterfeiting  of  money. 

Art.  17.— The  Banking 
Law,  promulgated  by  Execu- 
tive decree  March  6,  1882,  and 
all  other  Acts  inconsistent 
with  this  Act,  are  hereby  re- 
pealed. 


son  parte  de  dicho  Convenio, 
el  desempeno  de  cualquiera  y 
de  todas  las  funciones  conferi- 
das  a  ellos  y  la  restauracion 
y  sostenimiento  de  la  estabili- 
dad  del  sistema  monetario 
nacional ;  teniendo  las  disposi- 
ciones  que  con  este  fin  dicte  el 
Ejecutivo,  fuerza  legal  con  tal 
de  que  no  sean  incompatibles 
con  la  presente  ley. 

Art.  1 6 — Las  falsificaciones 
de  los  billetes  del  Banco  Na- 
cional, por  lo  que  toca  a  su 
penalidad,  queda  sujeta  a  las 
leyes  relativas  a  falsificaciones 
de  monedas. 

Art.  17 — Quedan  derogadas 
la  ley  bancaria  promulgada 
por  decreto  Ejecutivo  el  6  de 
Marzo  de  1882  y  todas  las 
demas  leyes  que  se  opongan 
a  la  presente. 


81 

APPENDIX  D. 

Agreement  in  Relation  to  Suspending  Further  Issues  of 
Paper  Currency. 

1. — LETTER  ON  BEHALF  OF  THE  BANKERS  TO  THE  PRESIDENT 
OF  THE  REPUBLIC. 

Managua,  January  5,  1912. 
Your  Excellency: 

We  beg  to  submit  for  your  respectful  consideration 
the  request  of  the  bankers  who  are  parties  to  the  Treas- 
ury Bills  Agreement  of  September  1,  1911,  that  assur- 
ances be  given  them  in  writing  in  a  form  legally  binding, 
that  there  shall  be  no  further  issues  of  paper  currency 
by  the  Government  of  the  Republic  of  Nicaragua,  nor  of 
any  form  of  government  obligation  capable  of  use  as 
currency. 

It  is  obviously  of  vital  importance  in  fixing  a  new  rate 
of  exchange  and  providing  an  adequate  reserve  fund  for 
maintaining  it  at  its  value  as  fixed  in  gold,  to  be  able 
to  calculate  with  precision  upon  the  amount  of  the  pres- 
ent circulation.  As  the  value  of  paper  currency  is  influ- 
enced to  a  considerable  extent  by  its  quantity,  it  is  im- 
possible to  formulate  plans  for  bringing  about  stability 
of  exchange  while  new  elements  of  instability  are  being 
introduced  by  the  issue  of  additional  bills. 

The  contract  made  by  the  bankers  with  the  Republic 
of  Nicaragua  in  the  Treasury  Bills  Agreement  of  Sep- 
tember 1,  1911,  was  made  on  data  furnished  by  Mr. 
Ernest  H.  Wands,  as  the  representative  of  the  Republic. 
The  statement  then  submitted  to  the  bankers  by  Mr. 
Wands,  upon  figures  furnished  him  by  representatives  of 
the  government,  was  that  the  outstanding  net  circulation 
of  paper  currency  was  30,902,603  pesos.  It  was  upon  this 
statement,  which  is  considered  by  the  bankers  of  the 
essence  of  the  agreement,  that  the  estimate  was  made  that 
stability  of  exchange  could  be  brought  about  at  approxi- 
mately the  market  rate  of  a  year  ago  with  the  proceeds 
of  the  loan  of  $1,500,000,  subject  to  the  deductions  for 


82 

other  purposes  provided  for  in  the  agreement.  The  state- 
ment furnished  by  the  Minister  of  Finance  as  of  Decem- 
ber 18,  1911,  gives  the  outstanding  circulation  of  paper 
currency  on  that  date  at  48,307,603  pesos — an  increase  of 
17,400,000  pesos,  or  more  than  50  per  cent.,  over  the 
amount  stated  to  Mr.  Wands.  Obviously,  this  additional 
issue,  by  adding  to  the  obligations  of  the  Eepublic,  has 
greatly  added  to  the  difficulty  of  working  out  a  solution 
of  the  problem  of  stable  exchange  with  the  resources  de- 
rived from  the  loan,  especially  in  view  of  the  desire 
expressed  in  many  quarters  for  a  rate  of  exchange  appre- 
ciably lower  than  the  market  rate  at  the  present  time. 

If  a  new  form  of  currency  is  to  be  substituted  for  the 
existing  national  Treasury  bills,  in  sufficient  amounts  t.o 
meet  the  requirements  of  the  country  upon  a  basis  which 
will  insure  its  practical  convertibility  with  gold  on  de- 
mand, then  it  is  of  vital  importance  that  the  amount  of 
currency  thus  determined  upon  sound  economic  princi- 
ples should  not  be  altered  or  increased,  except  in  compli- 
ance with  a  legitimate  demand  indicated  through  the 
usual  channels  of  commerce  and  banking.  It  would  be 
impossible  for  either  of  us,  with  due  regard  to  our  own 
reputation  or  the  interests  of  the  country,  to  give  our 
sanction  or  to  recommend  to  the  bankers  any  monetary 
arrangement  which  was  not  based  upon  these  fundamen- 
tal conditions — that  the  currency  should  be  kept  equal  to 
gold,  and  that  it  should  not  be  increased  in  amount,  ex- 
cept in  response  to  business  needs  and  upon  an  adequate 
reserve  of  gold. 

In  view  of  the  fundamental  importance  of  these  con- 
ditions, and  of  the  statement  of  the  bankers  to  us,  that 
they  cannot  consider  favorably,  without  a  written  assur- 
ance on  this  point,  the  measures  which  they  are  desirous 
of  taking  for  the  benefit  of  the  government  and  the  peo- 
ple of  Nicaragua,  we  beg  to  request  Your  Excellency  to 
advise  us  of  the  attitude  of  the  Government  of  Nicaragua 
in  this  respect,  as  interpreted  by  you  as  its  executive 
head,  and  also  to  advise  us  if  your  declaration  on  this 


83 

subject  will  be  indorsed  by  vote  of  the  National  Assem- 
bly as  one  of  the  measures  connected  with  the  plan  for 
monetary  reform  which  the  government  has  already 
given  assurances  shall  be  enacted  from  time  to  time  as 
may  be  considered  necessary. 

With  the  assurance  of  our  highest  esteem,  we  have  the 
honor  to  be, 

Yours  very  respectfully, 

F.  C.  HARBISON, 
CHARLES  A.  CONANT. 

2. — REPLY  OF  THE  PRESIDENT. 

Managua,  January  6th,  1912. 

Messrs.  Charles  A.  Conant  and  F.  C.  Harrison, 

City. 
Dear  Sirs : 

I  have  the  pleasure  of  referring  to  your  very  much 
esteemed  letter  of  the  4th  inst.  which  was  handed  to  me 
by  the  Hon.  Franklin  Mott  Gunther,  Charge  d  'Affaires  of 
the  United  States.  t 

I  have  given  it  due  attention,  and  in  justice  to  the  \ 
scientific  and  opportune  remarks  it  contains  regarding 
the  necessity  (in  respect  of  the  currency  reform)  of  a 
sure  guarantee  that  no  more  bills  shall  be  issued,  except 
when  indispensably  required  by  reason  of  the  economic 
situation,  and  backed  by  a  corresponding  gold  deposit,  I 
hasten  to  give  you,  by  means  of  the  present  communica- 
tion, the  most  solemn  declaration  that  the  amount  of  cur- 
rency thus  determined  upon  according  to  sound  economic 
principles  will  not  be  altered  or  increased,  except  under 
stress  of  legitimate  demand  indicated  through  the  usual 
channels  of  commerce  and  banking. 

And  in  order  that  this  declaration  may  have  legal 
force,  and  may  guarantee  the  promise  for  the  future,  I 
shall  introduce  into  the  National  Assembly  a  bill  to  pro- 
hibit future  issues  of  paper  currency  such  as  has  been 
the  custom  up  to  now. 


84 

With  the  expression  of  my  esteem  and  personal  con- 
sideration, I  remain, 

Yours  very  truly, 

ADOLFO  DIAZ. 

APPENDIX  E. 

Evidence  and  Memorials. 

1. — MEMORIAL  OF  LEADING  MERCHANTS  RECOMMENDING  AN 
EXCHANGE  BATE  OF  1,000. 

In  order  to  facilitate  the  important  work  which  has 
been  entrusted  to  your  great  proficiency  in  economic  sub- 
jects, we  venture  to  present  in  this  memorial  certain  data 
which  may  perhaps  give  you  some  idea  of  the  causes 
which  have  brought  about  the  present  monetary  crisis, 
thus  saving  you  wearisome  investigations  which  would 
delay  solution  of  the  important  problem  with  which  we 
are  all  so  concerned. 

From  the  time  of  the  first  issue  of  notes  in  1895  until 
the  middle  of  1902,  or  say  for  over  six  years,  the  national 
notes  did  not  depreciate  any  more  than  the  silver  coin 
represented  by  them.  It  may  therefore  be  said  that  the 
notes  retained  their  fixed  value,  which  was  equal  to 
that  of  the  silver  coin,  and  that  the  creation  and  suc- 
cessive issues  of  notes  had  not,  up  to  that  date,  disturbed 
or  altered  the  Eepublic's  economic  status,  inasmuch  as 
the  national  notes  fully  answered  their  intended  purpose 
as  substitutes  for  the  silver  coin  without  change  in  their 
nominal  and  effectual  value. 

This  equality  in  value  between  the  coin  and  the  notes 
representing  the  coin  was  maintained  during  that  long 
period  in  spite  of  countless  unfavorable  circumstances 
which  tended  perforce  to  depreciate  the  notes.  The  de- 
cline in  the  price  of  coffee,  which  began  to  drop  in  1896, 
reached  its  lowest  level  in  1899,  and  continued  stationary 
until  1905  at  extremely  low  figures;  the  poor  crops,  the 
constant  revolutions,  the  disturbances  in  Central  and 


85 

South  American  countries,  and  other  innumerable  causes 
which  it  is  unnecessary  to  relate,  failed  to  effect  any 
appreciable  decline  in  the  value  of  the  notes,  notwith- 
standing the  frequent  issues — a  demonstration  of  this 
country's  fabulous  wealth  and  inexhaustible  resources. 

In  1902,  the  explosion  of  the  city's  principal  armory, 
resulting  in  an  estimated  loss  of  more  than  two  million 
pesos,  gold,  and  producing  a  large  exodus  of  gold  for  the 
purchase  of  war  materials,  caused  exchange  to  rise  sud- 
denly to  600%,  at  which  figure  it  remained,  with  slightly 
varying  fluctuations,  until  the  year  1908 — and  all  this, 
notwithstanding  the  fact  that  the  issues  from  1900  to 
1908  reached  the  considerable  sum  of  eight  millions  in 
national  notes. 

Figuring  the  value  of  the  subsidiary  silver — which 
is  what  the  notes  practically  amounted  to  when  first 
issued — at  the  price  of  33^,  average,  that  is  at  300% 
exchange,  it  is  apparent  that  during  eleven  years  of 
constant  issues,  amounting  to  a  total  of  eleven  million 
national  pesos,  exchange  only  rose  300  points,  notwith- 
standing the  unfavorable  conditions  above  referred  to, 
which  continued  to  affiict  this  unhappy  country  and  were 
aggravated  by  the  war  with  Honduras  and  the  country's 
continuous  state  of  siege.  Moreover,  a  new  railroad  was 
constructed — the  i  i  Central, ' '  from  La  Paz  to  Managua — 
also  built  by  means  of  the  note  issues  referred  to. 

All  these  things,  occurring  during  the  administration 
of  General  Zelaya,  who  was  never  famous  as  a  prudent 
administrator  of  public  funds,  indicate  the  enormous 
economic  vitality  of  this  Eepublic,  since  it  was  able  to 
absorb  more  than  ten  million  pesos  in  paper  currency 
without  violent  disturbances  in  its  commercial  and 
economic  life,  which,  on  the  contrary,  steadily  improved, 
as  shown  by  the  financial  and  statistical  activities  of  the 
nation  for  the  last  ten  years. 

The  facts  related  in  the  foregoing  chapter,  which  are 
absolutely  authentic,  show  clearly  the  Republic's  faculty 
for  absorbing  paper  currency  and  the  thorough  economic 


86 

soundness  which  has  enabled  the  nation  to  bear  the  weight 
of  such  an  avalanche  of  token  money  without  being 
crushed  or  even  staggering  beneath  the  load  of  constant 
note  issues,  and  furnish  proof  of  a  surprising  wealth  and 
a  titanic  endurance  in  suffering  all  manner  of  economic 
errors. 

The  fact  that  in  the  last  two  years  the  enormous  sum 
of  $46,000,000  in  paper  money  has  been  issued,  while 
exchange  only  reached  2100%  for  a  few  days,  and  imme- 
diately declined  again,  is  another  most  eloquent  proof  of 
the  country's  economic  vitality  and  phenomenal  power 
to  recuperate  its  lost  energies  as  soon  as  the  cause  of 
the  momentary  exhaustion  has  been  removed. 

No  other  country  in  the  world,  with  a  population  as 
small  as  Nicaragua's,  and  after  a  war  as  long  and  dis- 
astrous as  the  last,  could  have  withstood  such  a  drain  of 
metal  without  falling  into  the  most  frightful  bankruptcy. 
But,  although  the  Republic's  present  situation  may  be 
considered  bad,  or  the  worst  ever,  yet  it  cannot  be  called 
disastrous,  considering  that  there  has  not  been  a  single 
failure  among  merchants  or  others.  With  a  few  months 
of  a  good  government,  things  would  return  to  their  nor- 
mal status  and  the  crops  would  bring  back  to  the  country 
the  enormous  quantity  of  gold  which  has  been  exported. 

Another  cause  of  the  sudden  rise  in  exchange  has  been 
the  excessive  importation  of  merchandise  during  the  last 
twelve  months.  The  belief  that  upon  the  coming  into 
power  of  the  conservative  party,  an  era  of  peace,  pros- 
perity and  good  government  would  be  inaugurated  and 
business  would  receive  an  unprecedented  impetus  was 
so  prevalent  in  every  class  that  all  the  merchants  en- 
larged their  orders  and  caused  accumulations  of  stock 
and  a  superabundance  of  bills  falling  due.  This,  in  con- 
junction with  the  exodus  of  gold  and  the  continuous 
issues  of  notes,  necessarily  produced  the  present  crisis, 
a  crisis  which  might  have  been  fatal  if  the  country  did 
not  possess  such  great  vitality  and  resources. 

For  the  reasons  above  stated,  the  present  exchange 


87 

rate  should  be  considered  as  merely  casual  and  tem- 
porary; the  rate  which  to-day  prevails  can  never  be  the 
basis  of  transactions  in  normal  times. 

The  causes  of  a  rise  so  disastrous  to  the  nation's 
economy  cannot  and  should  not  be  repeated ;  and  the  ar- 
rival of  the  Collector  of  Customs  and  the  establishment 
of  the  National  Bank  which,  subject  to  the  budget  laws, 
will  manage  the  nation's  funds,  are  more  than  sufficient 
to  prevent  such  repetition.  We  therefore  beg  the  hon- 
orable experts  not  to  allow  themselves  to  be  influenced 
by  this  fictitious  and  abnormal  situation,  and  to  adopt 
as  a  basis  for  their  calculations  the  average  rate  of  ex- 
change which  has  prevailed  in  normal  or  less  disastrous 
times  than  the  present. 

In  a  country  like  Nicaragua,  where  exports  are  50% 
greater  in  value  than  imports,  economic  crises  cannot 
continue  long;  the  gold  balance  remaining  to  the  credit 
of  the  nation,  if  not  foolishly  squandered,  soon  restores 
the  equilibrium  which  has  been  momentarily  disturbed 
by  transitory  and  exceptional  causes;  and  it  would  be 
absurd  to  adopt  as  a  rule  for  or  index  to  the  economic 
future  of  Nicaragua  the  present  financial  situation,  which 
is  only  the  result  of  a  long  and  disastrous  war  and  the 
fatal  consequence  of  an  uninterrupted  series  of  political 
and  economic  blunders. 

There  is  a  small  minority  which  believes  that  the 
government  should  take  advantage  of  the  present  rate 
of  exchange  in  order  to  convert  its  notes  and  thus  obtain 
a  considerable  economy  in  gold,  since  if  at  1,000% 
4,500,000  dollars  are  required  to  redeem  the  paper  cur- 
rency, only  3,000,000  dollars  are  required  with  exchange 
at  1,500%. 

At  first  sight  the  proposition  seems  very  alluring, 
especially  when  those  who  advance  it  add  that  the  public 
welfare  must  prevail  over  private  interests;  but  an  im- 
partial investigation  will  show  that  the  advocates  of  the 
proposition  base  their  arguments  upon  false  and  erro- 
neous premises. 


88 

To  reduce  the  cost  of  living,  especially  for  the  poor, 
has  been  the  promise  and  constant  hope  of  the  conserva- 
tive party.  Very  peculiar  and  unfortunate  circumstances 
have  prevented  it  from  realizing  those  good  intentions  in 
the  sixteen  months  of  its  administration ;  indeed,  the  cost 
of  living  has  so  increased  that  many  families  find  serious 
difficulty  in  meeting  it.  But  the  government  cannot  miss 
the  opportunity  which  is  offered  it,  through  the  Ameri- 
can loan  and  the  monetary  reform,  to  restore  matters 
to  their  normal  status  for  the  benefit  of  all  concerned. 

We  have  demonstrated  beyond  all  question  that  the 
rise  in  exchange  is  due  solely  and  exclusively  to  the 
constant  and  excessive  issues  of  notes;  and  as  those 
issues  have  all  been  authorized  by  the  three  administra- 
tions of  the  last  three  years,  the  present  government, 
which  has  issued  the  largest  amount,  should  not  take 
advantage  of  that  depreciation  to  buy  at  a  low  figure  the 
notes  which  are  now  in  circulation.  That  would  be  equiva- 
lent to  speculating  on  the  nation's  misfortunes  and  mak- 
ing the  public  pay  for  the  government's  economic  blun- 
ders. Such  action  would  be  the  very  height  of  adminis- 
trative and  financial  immorality. 

Speculation  on  the  value  of  money  is  a  tax  which 
weighs  heavily  upon  all  classes,  especially  so  upon  the 
poorer,  and  it  is  the  most  sterile  of  taxes,  for  though 
everybody  pays  it,  nobody  collects  it — it  burdens  every- 
body and  benefits  no  one.  The  disastrous  effects  of  such 
speculation  have  made  themselves  felt  during  these 
later  days,  when  labor  strikes — unknown  in  Nicaragua 
before  the  present  crisis — have  further  aggravated  the 
grievous  situation.  To  minimize  that  odious  and  useless 
burden  should  be  the  noble  and  unwavering  aspiration 
of  a  government  interested  in  the  well-being  of  its  citi- 
zens, and  the  false  prospect  of  economizing  a  few  millions 
should  not  prevent  the  government  from  carrying  out 
that  beneficient  work  of  true  social  betterment. 

Moreover,  it  is  a  fact  that  the  present  administra- 
tion, ever  since  it  came  into  power,  and  until  last  May, 


89 

consistently  declared,  in  reports  and  official  documents, 
its  determination  to  fix  exchange  at  1,000%  ;  and  it  was 
only  after  that  time,  for  reasons  still  unknown,  that  the 
government  decreed  the  fixing  of  the  official  exchange  at 
1,200%.  All  this  constitutes  a  moral  obligation  which 
the  government  should  respect,  for,  in  reliance  upon  the 
official  promise,  many  transactions  were  made  upon  that 
hasis. 

We  have  demonstrated  the  fallacy  of  the  saving  which 
the  government  would  apparently  make  in  converting  its 
paper  money  at  the  present  rate,  and  we  are  going  to 
show  not  only  that  our  statement  is  true,  but  also  that 
in  a  few  years  the  government's  designation  of  the 
present  extremely  high  rate  as  a  fixed  and  permanent 
rate  of  exchange  would  come  to  be  an  actual  burden. 

The  government  has  no  gold  income,  whereas  it  has 
many  obligations  payable  in  gold,  the  principal  one  being 
the  coupon  on  the  foreign  loan.  Calculating  its  expenses 
at  2,000,000  dollars,  which  is  not  an  overestimate  (for 
even  the  merchandise  which  the  government  buys  within 
the  country  is  paid  for  in  gold,  such  merchandise  being 
imported),  it  will  be  seen  that  the  government,  by  fixing 
exchange  at  1,500%  instead  of  at  1,000%,  as  it  had 
promised,  would  annually  have  to  pay  out  TEN  MIL- 
LION more  of  our  currency,  in  order  to  obtain  which  the 
government  would  be  obliged  to  double  taxation,  thus 
increasing  the  already  heavy  burdens  which  oppress  the 
public.  In  less  than  three  years  such  increase  would 
have  entirely  consumed  the  1,500,000  dollars  in  gold 
gained  in  the  conversion  of  notes,  and  it  would  continue 
thus  indefinitely,  inflicting  upon  the  taxpayers  the  tre- 
mendous burden  of  the  500-point  increase  in  exchange. 

By  fixing  exchange  at  1,000%,  the  government  can,  in 
addition  to  restoring  the  normal  status,  easily  levy  the 
customs  duties  at  the  same  exchange  rate,  instead  of  at 
650%,  as  is  now  done.  That  small  increase,  which  will 
wholly  and  positively  come  into  the  national  treasury, 
will  be  more  than  compensated  by  the  public 's  relief  from 


90 

the  heavy  burden  of  high  exchange  which,  as  already 
stated,  encumbers  all  and  benefits  no  one. 

Summing  up  our  arguments,  we  beg  of  the  honorable 
experts  that  the  rate  of  the  permanent  exchange,  for 
conversion  of  the  notes  now  in  circulation,  and  for  giv- 
ing value  to  the  new  notes  which  the  National  Bank  will 
issue,  be  fixed  at  1,000%,  as  that  is  the  only  rate  which 
truly  reconciles  the  interests  of  the  national  treasury 
and  of  every  social  class  in  the  Eepublic. 

Eespectfully  submitted, 


Octaviano  C£sar,  Manl.  Lacayo,  pp.  Sala  Chamorro  & 
Ca.,  T.  Chamorro  Ch.,  Ag.  Chamorro,  Cesar  Hnos., 
Frutos  Chamorro,  Alvarez  C.  Pinedo,  Inocente  Lacayo, 
Manuel  Zavala  &  Ca.,  Ernaldo  &  Jose  Ant°  Lacayo,  E. 
Cuadra  &  Ca.,  Eodolfo  Arana,  Eoberto  Martinez,  Juan 
Jose  Martinez,  Fenetti  &  Britano,  E.  Castillo  &  Ca.,  M. 
N.  y  Leonidas  Lacayo,  Angel  Eeyes  Ch.,  Franc0  Bustos 
&  Hnos.,  F.  Alf.  Pellas,  Adolfo  Benard,  Labern  &  Thomp- 
son, pp.  Franc0  Brooking,  HZM,  J.  Elizondo  6  Hijos, 
Fern0  Lacayo,  D.  Morales,  N.  Wolf  &  Co.,  Dionisio 
Chamorro,  Eodolfo  Lacayo,  Enrique  Pineda,  Filadf. 
Chamorro,  Pellas  &  Horvilleur,  S.  Unza,  D.  Lacayo,  M. 
Goodman,  Benj.  Vargas  A.,  W.  H.  Downing,  F.  Alvarado 
&  Cia,,  Fernando  Chamorro  &  H°,  David  Arellano,  pp. 
Munkel,  Miiller  &  Co.,  Arturo  Eeyes  h.,  Creyut  &  Ca,, 
The  Nicaragua  Sugar  Estates,  Ltd.,  C.  Merritt,  Srio.,  Luis 
Deseaud,  A.  Cortes,  Const.  Lacayo,  Angel  Caligaris, 
Bernheim  &  Portocarrero,  T.  P.  Bingham  &  Hijos,  W. 
Wheelock,  C.  Caso,  Eugenio  Lang,  F.  Lucingo. 

2. — MEMORIAL,  OF  MERCHANTS  OF  EIVAS. 

To  the  Financial  Experts: 

The  Department  of  Eivas  has  followed  with  much 
interest  the  proceedings  connected  with  your  mission, 
and  desires  that  its  voice  be  heard,  not  for  selfish  or 


91 

mean  ends,  but  through  patriotism.  This  city  prides  it- 
self on  having  given  signal  proof  of  its  patriotic  feeling 
in  all  difficult  situations  through  which  the  country  has 
passed. 

We  have  considered  and  discussed  the  financial  prob- 
lem in  all  its  bearings,  and  are  completely  in  accord  with 
the  arguments  put  forward  by  the  merchants  and  estate 
holders  of  Granada  and  Managua  in  favour  of  fixing  ex- 
change at  the  rate  of  one  thousand  per  cent,  as  being  the 
rate  most  suitable  to  the  requirements  of  the  country, 
and  which  would  tend  to  realize  the  ideal  of  the  greater 
part  of  the  Nicaraguans.  We  deem  it  useless  to  repeat 
those  arguments  here. 

There  are,  however,  political  reasons  not  dwelt  upon 
by  the  merchants  in  their  memorial,  to  which  we  intend 
to  refer,  viz.: 

The  Conservative  party  has  pledged  itself  to  care  for 
the  interests  and  welfare  of  the  Nicaraguan  people,  and 
should  exchange  be  fixed  at  a  high  rate,  these  interests 
would  suffer.  Such  a  measure  would  probably  bring 
about  a  revolution,  and  we  think  that  the  prominent  mem- 
bers of  the  Conservative  party  who  at  present  occupy 
important  posts  in  the  Government  cannot,  if  they  de- 
sire to  be  faithful  to  the  ideal  of  their  party,  sanction 
such  a  financial  measure — fatal  to  the  interests  of  their 
party  and  to  the  interests  of  the  country;  fatal,  more- 
over, to  the  friendly  feeling  of  Nicaragua  towards  the 
great  American  nation,  whose  intervention  in  our  finan- 
cial affairs  would  become  odious  and  be  regarded  in 
future  with  suspicion  and  distrust. 

For  these  reasons  we  ask  you  to  have  exchange  fixed 
at  as  low  a  rate  as  possible. 

Rivas,  27  December,  1911. 

(Signed)  Rafael  Urtecho,  Rosendo  Lopez,  Nemesio 
Martinez,  M.  A.  Vega,  Nemesio  Martinez  hijo,  Max  Gal- 
legos,  Isidro  Urtecho,  Ad.  Gallegos,  Juan  Cordon,  G. 
Gallegos,  Isidro  Urtecho  h.,  Leonidas  Guerra,  Luis 


92 

Gabuardy,  J.  A.  Navarrete,  Tomas  Marin,  D.  Maliano, 
Leonidas  Torres  &  Brothers,  Ltd.,  Hurtado  Bros.,  A. 
Valdez,  M.,  F.  E.  Viales,  P.  Hurtado,  David  Donee, 
Franco  Sacasa,  E.  Viales,  Kafael  A.  Viales. 

3. — MEMORIAL  OF  MERCHANTS  AND  PLANTERS  OF  LEON. 

Leon,  December  23rd,  1911. 

lion.  C.  A.  Conant  and  F.  C.  Harrison, 

Managua. 

The  undersigned,  desirous  that  you  should  take  into 
account  the  views  of  the  merchants  and  of  the  planters 
of  this  city  when  hearing  the  opinion  of  the  country  on 
the  subject  of  the  official  exchange  to  be  fixed  by  Govern- 
ment for  redeeming  the  national  paper  currency,  take 
the  liberty  of  sending  you  this  letter. 

In  our  view,  the  best  interests  of  the  country  and  of 
the  Government  (which  are  identical)  demand  an  ex- 
change of  1,000%,  and  we  agree  entirely  with  the  memo- 
rial addressed  to  you  on  the  15th  of  this  month  by  the 
merchants  of  Granada  and  by  some  of  those  from 
Managua. 

(Signed)  Ed  Lacayo  &  Co.,  Ed.  Lacayo,  planter; 
Tomas  Lang,  for  Pellas  and  Horvilleur;  Julian  Tercero, 
Jose  Maria  Tercero,  Benjamin  Gallo,  Jose  Maria  Cortes, 
J.  Gustavo  Cortes,  Constantino  Herdocia,  Liberato 
Cortes,  Jorge  Abraham,  A.  Herdocia,  Eobelo  &  Co.,  Nor- 
berto  Salinas,  .Isidoro  E.  Gaitan,  J.  Prio,  Tulio  Amado 
Aguilar,  Tomas  Pereira,  Carlos  Overend,  H.  Mores  & 
Co.,  Horacia  Lanzas,  How  On  Chon,  Abraham  Arguello, 
Irineo  Mantilla,  M.  Castillo,  Pedro  J.  Cerna,  Camilo 
Somarriba,  for  Quan  On  Lon  &  Co.;  J.  Leon  Quant, 
G.  Herdocia,  Presentacion  Aguilera,  Domingo  Salinas, 
Cesar  Arana,  J.  A.  Montalvan,  J.  Sanson,  Gustavo  E. 
Lacayo,  Narcisco  Lacayo  &  Co.,  Francisco  Cardenal,  Sal- 
vador Cardenal,  Pedro  Balladares  Icaza,  P.  Arguello, 
Salvador  Keyes,  Tomas  Telleria. 


93 

4 — STATEMENT  OF  A.  J.  MARTIN,  ESQ.,  MANAGER  OF  THE 
BANCO  COMERCIAL  DE  NICARAGUA,  December  16,  1911. 

Q.  Has  the  rise  in  exchange  caused  a  corresponding 
rise  in  prices? 

A.  Yes.  Practically,  the  rise  is  even  greater  than  the 
rise  in  exchange. 

Q.  Even  in  the  case  of  this  recent  heavy  rise  in  ex- 
change, has  exchange  been  accompanied  by  a  similar  rise 
in  prices? 

A.  Yes. 

Q.  Has  this  rise  in  prices  been  due  to  other  causes 
than  the  rise  of  exchange? 

A.  Yes;  other  minor  causes.  Labor  is  exceedingly 
scarce,  and  it  is  difficult  to  find  people  to  work  on  the 
plantations.  The  heavy  rains,  preceded  by  a  drought, 
ruined  some  of  the  local  products,  which  have  gone  up 
nearly  double.  The  price  of  labor  has  also  gone  up. 

Q.  Has  this  rise  in  prices  been  accompanied  by  a  rise 
in  wages,  expressed  in  Nicaraguan  currency? 

A.  Yes.  The  rise  in  the  wages  of  the  day-laborer 
has  kept  a  little  under  the  rise  in  exchange. 

Q.  Has  the  rise  in  wages  been  as  rapid  as  the  rise  in 
prices  ? 

A.  It  goes  a  little  slower. 

Q.  Has  there  been,  since  1897,  a  large  increase  in 
exports  of  merchandise  from  Nicaragua? 

A.  I  think  the  volume  of  export  has  risen  since  1897, 
but  it  is  exceedingly  difficult  to  obtain  reliable  statistics 
from  the  government. 

Q.  Has  there  been,  since  1897,  an  increase  or  decrease 
of  imports  into  Nicaragua? 

A.  The  increase  in  imports  has  been  very  large  since 
the  revolution. 

Q.  What,  in  your  opinion,  has  been  the  cause,  par- 
ticularly in  regard  to  matters  within  your  personal 
knowledge? 

A.  The  increase  in  the  volume  of  exports  and  imports 


94 

is  due  to  the  general  progress  of  the  country.  Since  the 
revolution  and  the  promise  of  American  intervention  to 
place  Nicaraguan  financial  affairs  on  a  sound  basis,  there 
has  been  a  large  increase  of  imports  in  anticipation  of 
better  times — stable  government,  good  administration, 
peace,  and  a  sound  economic  basis.  These  are  paid  for 
by  six  and  nine  months '  credits. 

Q.  Has  the  country  benefited  by  the  appreciation  in 
exchange  ? 

A.  No ;  certainly  not ;  quite  the  contrary.  A  high  ex- 
change rate  is  prejudicial. 

Q.  What,  in  your  opinion,  should  be  the  rate  of  con- 
version of  the  present  paper  currency  of  Nicaragua  into 
gold,  if  such  conversion  is  desirable,  or  is  to  be  made  ? 

A.  1,000  per  cent. 

Q.  Why  1,000  per  cent? 

A.  I  am  unable  to  give  one  definite  and  comprehensive 
reason,  but  economical  and  general  considerations  have 
led  me  to  consider  that  such  a  figure  would  be  acceptable 
to  all  parties. 

1.  The  importers  would  benefit  by  a  fixed  rate  of 
1,000,  because  if  they  have  sold  their  goods  on  credit  at 
present  high  rates,  when  they  collect  they  will  be  able  to 
purchase  more  gold  owing  to  the  lower  rate.    In  so  far  as 
future  business  goes,  a  fixed  rate  will  suit  them,  and 
for  general  purposes  the  lower  the  better.    They  will  be 
able  to  scale  down  their  prices,  hence  better  business, 
and  they  will  not  have  to  liquidate  the  prices  of  their 
goods  at  200/300  points  higher  than  the  current  rate  to 
guarantee  themselves  against  loss. 

2.  The  exporter,  who  at  first  sight  might  be  thought 
to  suffer,  will,  on  the  contrary,  benefit  by  a  fixed  rate  of 
1,000.    The  price  of  labor  will  go  down,  as  also  the  prices 
of  provisions  and  current  expenses.    The  ignorant  coffee 
grower  may  appeal  for  a  higher  rate,  but  that  is  due  to 
ignorance,  as  he  only  understands  that  he  will  get  less 
for  his  coffee  in  Nicaraguan  money;  he  doesn't  realize 


95 

that  he  will  be  able  to  purchase  as  much  with  the  smaller 
amount  of  money  received  as  with  the  larger  amount  ob- 
tained if  he  sells  his  coffee  locally  at  the  present  higher 
rate  of  exchange.  I  would  suggest  that  the  Commis- 
sioners take  the  opinions  of  the  educated  coffee  growers, 
such  as  Dr.  Eosendo  Chamorro,  Mr.  Pellas,  Messrs. 
Munkel,  Miiller  &  Co.,  and  others.  I  am  convinced  that 
they  would  favor  a  fixed  rate  of  1,000  per  cent. 

3.  Private  bankers  will  benefit  by  a  fixed  rate,  as 
with  a  fluctuating  rate  there  is  no  rate  of  interest  that  can 
compensate  a  rise  of  hundreds  of  points  in  exchange,  and 
many  are  suspending  their  discounting  operations  in  cur- 
rency for  this  reason. 

4.  It  will  not  affect  small  farmers,  because  if  it  is 
true  that  the  prices  at  which  they  sell  their  farm  products 
are  reduced,  and  which  is  doubtful,  it  is  equally  true  that 
the  price  of  labor  will  go  down  and  their  current  ex- 
penses. 

5.  For  foreign  enterprises,  a  fixed  exchange  of  1,000 
per  cent,  or  less  will  be  beneficial.    Take  the  case  of  fire 
and  life  insurance:  A  great  number  of  merchants  and 
other  people  have  allowed  their  life  premiums  and  fire 
policies  to  lapse,  owing  to  their  inability  to  pay  at  present 
high  rates  of  exchange. 

6.  In  general,  a  fixed  exchange  of  1,000  means  a  bet- 
terment of  trade  conditions  all  around,  as  at  present 
many  enterprises  are  not  undertaken,  solely  on  account 
of  the  fluctuating  exchange  rates.    Either  the  enterpriser 
does  not  care  to  risk  his  money,  or  he  cannot  obtain  any 
financial  assistance  from  banks  for  the  same  reason. 

7.  The  only  class  of  people,  as  far  as  I  can  judge, 
who  would  suffer  discomfort — and  they  are  a  small  com- 
munity— are  the   small   shopkeepers   who   have  bought 
their  stock-in-trade  locally  and  owe  for  same  in  currency. 

I  will  add  that  I  have  no  personal  interest  at  all  in 


96 

the  rate  to  be  fixed.  The  above  reasons  given  are  made 
after  careful  reflection,  and  I  know  from  conversations 
that  the  importer  and  exporter  in  general  favors  a  fixed 
rate  of  1,000  per  cent. 

Q.  What  would  be  the  effect  of  the  rate  of  conver- 
sion suggested  by  you  upon  prices  of  merchandise? 

A.  An  exchange  of  10  to  1  would  tend  to  scaling  prices 
down. 

Q.  What  would  be  the  effect  of  such  rate  upon  wages 
and  upon  the  purchasing  power  of  wages? 

A.  Wages  would  fall,  but  not  so  fast  as  the  falling 
exchange.  If  undue  reductions  were  made  in  wages  im- 
mediately, the  planters  could  not  get  the  men;  and  they 
could  not  afford  to  take  any  risks.  Therefore,  the  price 
of  labor  would  go  down  slower,  and  so  soon  as  the 
laborer  discovered  that  the  purchasing  power  of  his  lower 
wage  was  as  great  as  his  previous  wage. 

Q.  What  would  be  the  effect  of  such  rate  upon  ex- 
ports of  merchandise,  especially  in  regard  to  articles 
within  your  personal  knowledge  ? 

A.  I  will  cite  the  case  of  a  coffee-grower.  If  he  oper- 
ates on  a  falling  exchange,  he  is  considerably  hum- 
bugged ;  but  with  a  fixed  exchange,  he  knows  where  he  is. 
A  fixed  exchange  would  be  beneficial  to  the  export  of 
merchandise.  At  a  given  rate  of  1,000,  I  do  not  consider 
that  exporters  would  suffer,  and  they  would  certainly 
reap  advantages  later  on,  when  their  expenses  became 
steadier,  by  a  fixed  exchange  rate. 

Q.  What  would  be  the  effect  of  such  rate  upon  im- 
ports of  merchandise,  especially  in  regard  to  articles 
within  your  personal  knowledge? 

A.  It  would  be  beneficial  as  well.  I  do  not  think  a 
rate  of  1,000  would  check  imports,  but  on  the  contrary. 

Q.  What  would  be  the  effect  of  a  fixed  rate  upon  the 
movement  of  foreign  capital  into  Nicaragua? 

A.  I  think  a  fixed  rate  of  exchange  would  be  beneficial 
all  around.  Many  enterprises  here  would,  I  think,  be 
taken  up  if  we  had  a  fixed  rate  of  exchange.  The  railroad 


97 

from  Masaga  to  Diriamba  was  made  with  currency  and 
the  contractor  broke,  simply  on  account  of  the  rise  of 
exchange. 

Q.  Would  the  issue  of  a  paper  currency  adequately 
protected  by  gold  funds  be  an  acceptable  substitute  for 
the  present  fluctuating  paper  currency  ! 

A.  Undoubtedly.  The  unit  could  be  in  paper  as  well 
as  silver. 

Q.  If  a  gold  standard  is  to  be  introduced  into  Nica- 
ragua, what  should  be  the  value  of  the  gold  unit — should 
it  correspond  approximately  to  the  franc,  the  shilling, 
the  two-shilling  piece,  the  old  gold  peso,  the  present 
Mexican  peso,  or  the  dollar  of  the  United  States! 

A.  I  think  that  the  Mexican  system  (the  American 
half-dollar)  would  be  the  standard  unit,  because  money 
here  is  very  much  cheaper  than  in  the  States,  and  the 
lower  unit  would  facilitate  operations.  Labor  is  very 
much  cheaper  as  well,  and  the  laborers  want  a  low  stand- 
ard. I  think  the  subdivisions  would  be  too  large  in  the 
case  of  a  dollar.  Eeflecting  over  the  matter,  I  think  that 
the  unit  should  be  equivalent  to  the  half-dollar,  but  that 
the  coin  and  subsidiary  coins  should  be  special  Nica- 
raguan  coins. 

Q.  What  coins  should  be  issued  in  subdivisions  or 
multiples  of  the  unit! 

A.  The  denominations  of  50,  25,  10  and  5  centavos. 

Q.  Would  silver  coins  up  to  a  maximum  value  of 
perhaps  two  francs  or  two  shillings,  with  smaller  sub- 
divisions, be  acceptable  in  circulation  in  Nicaragua? 

A.  Yes.  The  highest  silver  coin  should  be  the  unit, 
which  would  be  100  cents  gold.  I  will  add  later  the  low- 
est unit  I  consider  suitable  in  silver,  and  lower  than  that 
I  have  no  objection  to  nickel. 

Q.  Is  the  fractional  nickel  currency  acceptable  in  cir- 
culation! 

A.  It  is  taken  in  stated  quantities.  The  people,  and 
particularly  now  the  planters,  like  nickel.  The  common 
people  of  the  towns  have  no  objection  to  nickel  in  certain 


98 

proportion,  of  course.  In  a  general  way,  no  objection 
is  made  to  nickel  as  nickel. 

Q.  What  are  the  fluctuations  in  exchange  due  to  sea- 
sonal movements  of  merchandise? 

A.  There  is  a  time,  of  course,  when  the  exchange  is 
higher  and  lower.  Exchange  is  generally  lower  during 
the  crop-moving  time.  The  coffee  crop  runs  from  Decem- 
ber to  March.  Planters  require  their  money  about  Sep- 
tember. The  demand  for  financing  the  coffee  crop  begins 
in  September  and  lasts  until  February  or  March.  Ex- 
change during  that  period  is  generally  on  the  downward 
turn.  Exports  of  cattle  during  the  summer  months  also 
tend  to  drop  exchange.  I  am  speaking  mainly  of  the 
Pacific  seaboard.  The  Atlantic  seaboard  trade  depends 
mainly  on  the  banana,  gold,  and  a  small  amount  of  rub- 
ber. The  banana  trade  runs  all  the  year  around,  and 
the  rubber  trade  similarly.  On  the  Atlantic  coast  there 
are  no  particular  seasonal  fluctuations.  The  Atlantic  and 
Pacific  trades  are  entirely  distinct.  On  the  Pacific  coast, 
there  is  a  dull  season  from  May  to  August,  in  which  ex- 
change tends  to  rise. 

Q.  Is  there  any  particular  season  when  imports  are 
heaviest  ? 

A.  Not  to  speak  of,  really.  No.  The  sensible  mer- 
chant will  take  no  risks  and  will  even  buy  ahead.  Certain 
import  merchants  try  to  protect  themselves  against  ex- 
change by  buying  it  forward. 

Q.  Is  exchange  normally  in  favor  of  either  the  sea- 
board or  the  interior;  or  in  favor  of  the  large  towns  or 
the  interior? 

A.  With  stable  exchanges,  the  people  who  require 
money  in  the  interior  would  have  to  pay  to  get  it.  When 
exchange  is  stable,  the  planting  community  would  have 
to  pay  a  premium  to  get  their  currency. 

Q.  What  are  the  methods  and  cost  of  moving  funds 
between  the  cities  and  the  interior? 

A.  Generally  by  a  merchant  taking  his  money  down 
himself.  Merchants  transport  their  own  funds  to  the 


99 

interior  at  present,  which  is  due  entirely  to  the  high 
rate  of  exchange. 

Q.  What  is  approximately  the  present  rate  of  ex- 
change between  Nicaragua  and  London  and  Nicaragua 
and  New  York,  when  the  currency  of  Nicaragua  is  re- 
duced to  a  gold  basis? 

A.  Generally  one  and  one-half  per  cent.  With  a  stable 
exchange,  we  would  have  to  work  out  exact  calculations. 
I  will  try  and  give  you  my  idea  as  to  what  the  two  bullion 
points  would  be  between  New  York,  Nicaragua  and  Lon- 
don. Some  long  time  having  elapsed  since  I  have  made 
shipments  of  bullion  to  New  York  and  London,  I  am 
not  to-day  conversant  of  the  freight  and  insurance  rates, 
but  these  could  easily  be  obtained,  if  required. 

Q.  Would  a  system  of  currency  which  permitted  the 
conversion  of  drafts  upon  London  and  New  York  into 
Nicaraguan  currency  at  a  fixed  rate  of  exchange  tend  to 
maintain  adequately  the  convertibility  of  the  currency 
of  Nicaragua? 

A.  Yes. 

Q.  Would  such  a  system  of  currency  tend  to  promote 
trade  with  foreign  countries? 

A.  It  would  be  beneficial  all  around. 

Q.  Would  such  a  system  of  currency  tend  to  increase 
the  investment  of  foreign  capital  in  Nicaragua? 

A.  Yes.  It  would  assist  foreign  enterprise.  There 
are  plenty  of  enterprises  here  which  would  be  taken  up 
if  we  had  a  fixed  exchange.  If  exchange  is  taken  at  10 
instead  of  the  rate  of  the  day,  I  do  not  anticipate  any 
serious  loss  to  the  community  except  to  small  retail  shop- 
keepers. A  large  part  of  the  importers  have  already  cut 
off  the  credit  of  the  small  shopkeeper. 

Q.  Do  you  think  that  there  is  a  large  outstanding 
volume  of  obligations  in  national  currency? 

A.  Yes.  Debts  of  real  estate  and  commercial  debts. 
People  who  have  bought  coffee  estates  would  be  paid  in 
paper  a  year  ahead.  There  has  been  a  movement  for  the 


100 

last  six  months  to  speculate  on  the  basis  of  exchange 
being  taken  at  much  lower  than  the  market  rate. 

Q.  In  what  form  do  you  keep  your  deposit  accounts  f 
Jh  gold  or  paper? 

A.  Both. 

Q.  How  would  you  readjust  your  paper  obligations? 
Would  you  pay  depositors  the  same  number  of  pesos 
they  had  deposited? 

A.  Yes. 

5. — STATEMENT  OF  N.  H.  LAWDER,  ESQ.,  GENERAL  MANAGER 
OF  BELANGER'S  INCORPORATED,  AND  AGENTS  IN  BLUE- 
FIELDS  OF  THE  ATLANTIC  FRUIT  &  STEAMSHIP 
COMPANY,  DECEMBER  16TH,  1911. 

Belanger's  Incorporated  are  the  largest  importers 
and  distributors  of  general  merchandise  on  the  Atlantic 
Coast  of  Nicaragua,  dealing  in  provisions  of  all  kinds, 
general  dry  goods,  notions,  boots  and  shoes,  lumber, 
hardware,  mining  machinery  and  supplies,  oils,  planta- 
tion supplies,  etc. — which  they  distribute  over  the  terri- 
tory from  Greytown  North  to  Cape  Gracias  and  up  the 
different  rivers  along  the  coast  at  various  points  as  far 
West  as  the  Pis  Pis  Mining  District.  They  export  rub- 
ber in  large  quantities,  gold,  cocoanuts,  tortoise  shell, 
and  bananas. 

The  currency  of  the  Atlantic  Coast,  with  the  exception 
of  Greytown,  is  practically  on  a  gold  basis.  The  books 
of  all  merchants  are  kept  in  gold,  purchases  and  sales 
are  made  on  a  gold  basis  and  prices  fixed  in  the  same 
standard.  Payment  in  silver  is  always  accepted  for  the 
equivalent  of  gold  amounts  at  the  current  rate  of  ex- 
change. The  currency  in  general  circulation  is  the  Cen- 
tral American  silver  pesos  or  soles  of  Gautemala,  San 
Salvador,  Honduras  and  Peru,  all  of  which  have  the 
same  value.  Haitian,  San  Domingo  and  Colombia  pesos 
are  not  current  except  at  rates  much  lower  than  their 
real  value.  There  is  also  little  or  no  Mexican  or  Costa 
Eican  silver  in  circulation.  Prior  to  the  Eevolution  of 


101 

1909,  large  quantities  of  soles  were  shipped  from  Blue- 
fields  by  the  Government  and  representatives  of  monop- 
olies to  the  interior  of  the  country. 

For  many  years  the  supply  of  silver  on  the  Coast  has 
not  been  sufficient  for  requirements,  and  it  has  been  neces- 
sary for  the  banana  companies  and  others  to  import  from 
New  Orleans.  The  price  of  soles  in  Bluefields  is  gov- 
erned largely  by  their  market  value  in  New  Orleans  and 
New  York  and  the  rate  of  exchange  fixed  by  the  mer- 
chants and  banana  companies  operating  on  the  Atlantic 
Coast.  For  the  three  years  prior  to  November  15th, 
1911,  this  rate  was  fixed  at  40  cents.  During  1908,  and 
part  of  1909,  the  rate  was  38  cents,  and  previous  to  1907 
was  as  high  as  48  cents.  Since  about  December  6th, 
1911,  soles  have  been  worth  42  cents.  There  would  be 
little  or  no  difficulty  in  establishing  a  stable  paper  cur- 
rency on  the  Coast,  provided  the  people  were  convinced 
it  had  a  real  value  properly  guaranteed.  A  paper  cur- 
rency of  uncertain  value,  such  as  the  present  paper 
money  in  the  interior,  would  not  be  accepted  under  any 
circumstances.  I  do  not  think  it  would  make  any  im- 
portant material  difference  whether  the  value  of  the  unit 
of  the  proposed  new  currency  was  40  cents  or  50  cents, 
gold.  Personally,  largely  for  purposes  of  convenience, 
I  would  prefer  to  have  it  50  cents  or  two  paper  dollars 
equal  to  one  dollar  gold.  All  employers  of  labor  would 
doubtless  prefer  to  see  it  40  cents — the  approximate 
average  value  of  the  present  sole  or  silver  peso.  The 
exchange  or  value  of  Nicaraguan  paper  currency  does 
not  at  present  affect  the  interests  of  the  Atlantic  Coast 
—that  is  to  say,  Bluefields,  Pearl  Lagoon,  Prinzapulca 
and  Cape  G-racias.  It  is  not  current  or  in  fact  consid- 
ered legal  tender  and  will  not  be  accepted  until  it  has 
some  fixed  and  properely  established  value.  Owing  to 
the  scarcity  of  soles,  the  merchants  and  banana  compan- 
ies of  Bluefields  have  been  compelled  during  the  last 
eight  months  to  import  U.  S.  currency  to  assist  in  pay- 
ing off  laborers.  To  economize  the  use  of  silver  and 


102 

also  for  other  purposes  of  convenience  they  also  issue 
drafts  on  their  companies  in  New  Orleans  and  New  York. 
I  do  not  think  there  is  over  $250,000  silver  in  circula- 
tion at  this  time  on  the  entire  Atlantic  Coast.  I  think 
under  new,  stable  and  anticipated  improved  conditions 
a  much  larger  amount  of  silver  or  its  equivalent  in  other 
money  will  be  required.  I  would  much  prefer  silver  to 
a  50-cents  paper  bill. 

The  present  wage  of  the  agricultural  laborer  is  from 
1.00  to  1.20  soles  per  day  and  board.  The  rate  has  been 
raised  in  some  of  the  more  remote  sections  during  the 
past  two  years  from  1.00  soles  to  1.20  soles  per  day, 
and  keep.  Laborers  at  the  gold  mines  receive  from  2.50 
to  3.50  soles  per  day  without  board.  I  anticipate  that, 
due  to  proposed  large  agricultural  developments,  the 
wage  of  agricultural  labor  will  probably  have  to  be  ad- 
vanced. At  present  there  is  no  large  importation  of 
labor  from  other  countries,  but  I  believe  it  will  be  neces- 
sary to  import  workmen  before  many  months  have 
passed. 

The  exports  of  bananas  are  considerably  larger  now 
than  before  the  revolution  of  1909.  Until  a  few  months 
before  the  commencement  of  the  revolution,  the  only 
steamship  service  to  Bluefields  was  that  maintained  by 
the  Bluefields  Steamship  Company  with  two  ships,  be- 
tween them  making  weekly  sailings  from  New  Orleans. 
A  third  steamer  was  added  to  this  service,  if  I  remember 
correctly,  in  May  or  June,  1909.  Since  December,  1910, 
the  Atlantic  Fruit  &  Steamship  Company  has  had  two 
ships  plying  between  New  York  or  New  Orleans  and 
Pearl  Lagoon  and  Bluefields.  For  some  months  past 
these  steamers  have  been  sailing  exclusively  from  New 
Orleans,  making  a  weekly  schedule  to  Pearl  Lagoon  and 
Bluefields.  Since  November,  1911,  the  United  Fruit  Com- 
pany has  also  installed  a  weekly  fruit  steamer  service 
between  New  Orleans  and  Bluefields.  The  Atlantic  Fruit 
&  Steamship  Company  will  soon  add  other  steamers  to 
its  Nicaraguan  fleet,  which,  as  soon  as  the  Pearl  Lagoon 


103 

Bar  is  dredged  (work  on  which  has  already  been  com- 
menced), will  sail  with  bananas  to  Europe.  The  banana 
shipments  of  this  Company  will  increase  5  to  10  fold  or 
more  in  the  course  of  the  next  two  years,  and  it  is  ex- 
pected there  will  also  be  a  large  increase  in  the  exporta- 
tions  of  the  United  Fruit  Company. 

Alluvial  gold  is  brought  to  us  on  account,  but  not  in 
as  large  quantities  as  formerly.  We  advance  merchan- 
dise on  such  gold  deposits  to  the  extent  of  80  per  cent., 
or  perhaps  more,  of  the  value  estimated  on  a  conservative 
basis,  and  ship  the  gold  on  owner's  account,  crediting 
him  with  proceeds  on  receipt  of  certificates  from  the  New 
Orleans  Assay  Office.  The  merchants  of  Bluefields  also 
export  the  gold  produced  by  the  various  gold  mines  on 
the  coast,  shipping  the  quartz  gold  in  the  form  of  amal- 
gam, the  fineness  of  which  varies  from  $10  to  $16.50  U.  S. 
currency,  or  more,  per  ounce,  to  New  Orleans  for  owner 's 
account.  The  progress  of  the  coast  mining  industry  has 
been  considerably  disturbed  and  interfered  with  by  un- 
settled conditions  during  and  since  the  revolution.  There 
are  valuable  mines  in  the  Pis  Pis  and  other  districts  held 
by  men  without  sufficient  capital  or  knowledge  to  prop- 
erly develop  them.  I  have  great  confidence  in  the  possi- 
bilities of  the  future  of  the  industry  with  good  govern- 
ment. Its  successful  development  depends  very  largely 
on  some  of  the  more  valuable  properties  falling  into  the 
hands  of  capable  people  with  sufficient  capital  to  prop- 
erly develop  them.  The  gold  mines  and  their  monthly 
yield  are: 

La  Luz  $30,000. 

Bonanza  20,000. 

Topaz    5,000. 

Siempre  Viva  

Santa  Eita 2,500. 

Concordia  2,000. 

Lone  Star 8,000. 

Various  others  5,000. 


104 

With  railroad  communication  between  Bluefields  and 
the  interior  of  Nicaragua  I  believe  that  a  large  part  of 
the  cattle  now  driven  overland  from  the  Province  of 
Chontales  to  Costa  Eica  will  be  shipped  over  the  rail- 
road to  the  seaboard.  A  railroad  would  also  immediately 
develop  a  large  export  trade  in  mahogany,  cedar  and 
hardwood  from  the  virgin  forests  adjacent  to  the  route 
of  the  proposed  railroad  from  Rama  to  Lake  Nicaragua, 
and  would  also  probably  lead  to  the  development  of  gold 
mines  in  regions  now  quite  inaccessible.  Practically  all 
of  the  timber  and  other  lands  along  the  route  of  this 
proposed  railroad,  with  the  exception  of  the  grazing 
country  in  the  Province  of  Chontales,  are  owned  by  the 
Government.  This  proposed  Eama  to  the  interior  rail- 
road would  also  bring  about  a  tremendous  increase  in 
the  planting  and  export  of  bananas.  It  is  my  opinion 
that  the  timber  traffic  alone  should  make  such  a  railroad 
pay  from  the  beginning. 

The  importers  of  Bluefields  and  other  ports  on  the 
Atlantic  Coast  pay  their  duties  on  a  gold  basis,  while  in 
the  interior  of  Nicaragua  the  customs  duties  are  paid  in 
paper.  The  Government  accepts  paper  in  payment  of 
duties  on  merchandise  imported  through  Corinto  and 
other  Pacific  ports  on  a  basis  of  650  to  100,  whereas  the 
importers  are  able  to  buy  Nicaraguan  currency  at  from 
1,800  to  2,250  to  100.  The  result,  very  apparent,  is 
greatly  to  the  disadvantage  of  the  interests  of  the  Atlan- 
tic Coast.  The  present  tariff  in  effect  on  the  Atlantic 
Coast  is  the  silver  tariff  of  1902,  which  is  lower  than  that 
published  by  the  administration  of  President  Zelaya  in 
1908,  which  was  in  effect  up  to  the  beginning  of  the  revo- 
lution of  1909.  The  tariff  now  in  force  on  the  Coast, 
taken  as  a  whole,  is  a  comparatiely  fair  one.  The  duties 
on  many  articles,  however,  could  be  materially  reduced 
to  the  advantage  of  all  concerned  and,  in  my  estimation, 
would  lead  to  a  much  larger  consumption  of  the  articles 
referred  to,  and  result  in  a  larger  revenue  to  the  Gov- 


105 

eminent  from  the  importation  of  these  articles.    A  few 
of  them  are  as  follows : 

Nails,  certain  classes  of  hardware,  building  ma- 
terials, felt  and  other  hats,  fine  shoes,  linen  goods  of 
all  kinds,  silk  ribbons,  silk  piece  goods,  various  kinds 
of  acids  used  in  the  manufacture  of  ice,  patent  medi- 
cines, rifle,  revolver  and  shotgun  cartridges,  paints, 
lubricating  oil,  woolen  textiles,  garments,  articles  of 
wood  not  specified  in  the  tariff,  lime,  whiskey. 

The  Atlantic  Fruit  &  Steamship  Company,  as  suc- 
cessors to  the  C.  A.  G.  &  T.  Co.,  has  a  contract  with  the 
Government  by  which  it  is  authorized,  among  other 
things,  to  collect  an  export  duty  of  five  cents  per  bunch, 
gold,  on  all  bananas  exported  from  the  port  of  Pearl 
Lagoon.  It  has  never,  however,  attempted  to  enforce  this 
privilege. 

The  supply  of  silver  currency  being  deficient,  we  are 
usually  glad  to  issue  exchange  on  New  York  at  par  in 
exchange  for  soles  at  the  current  rate.  When  such  ex- 
change is  issued  for  gold,  the  exchange  charged  is  usually 
one  per  cent.  I  have  never  heard  or  known  of  any  money 
being  shipped  from  Bluefields  to  Managua  or  other  in- 
terior cities  by  the  Government  or  others  since  the  revo- 
lution. Ordinarily  the  receipts  of  Bluefields  and  other 
Atlantic  Coast  ports  and  towns  should  exceed  expendi- 
tures. This  was  always  true  prior  to  the  revolution  of 
1909.  Since  the  revolution,  the  surplus  revenues  of  the 
Government  from  receipts  of  the  Atlantic  Coast  have,  I 
understand,  been  utilized  in  paying  Government  soldiers, 
army  pensioners  and  debts  incurred  by  the  Government 
during  the  revolution. 

6. — STATEMENT  OF  MR.  E.  PALAZIO,  IMPOKTEK  AND  BANKER, 

December  18,  1911. 

I  am  a  commission  agent  in  Corinto  and  partner  in 
the  Banco  Comercial  at  Managua,  and  have  resided  in 
the  country  for  the  past  twenty-seven  years. 


106 

Mr.  Palazio  continued  with  the  following  remarks  and 
replied  to  the  questions  in  re  the  Nicaraguan  currency 
submitted  by  Messrs.  Conant  and  Harrison. 

Q.  Has  the  rise  in  exchange  caused  a  corresponding 
rise  in  prices  ? 

Q.  If  the  rise  in  exchange  has  not  caused  a  corre- 
sponding rise  in  prices,  what  is  your  estimate  of  the 
ratio  of  the  rise  in  prices  which  has  taken  place  1 

A.  Not  in  proportion.  Of  course,  the  prices  of  goods 
are  more  or  less  in  proportion  to  the  rate  of  exchange. 
The  rate  of  exchange  has  been  behind  for  this  reason: 
When  you  sell  to-day  any  kind  of  goods  with  an  exchange, 
say,  of  eight,  you  have  to  be  deterred,  you  cannot  sell 
goods  in  the  country,  so  you  sell  at  three  months.  Gen- 
erally when  that  invoice  becomes  due,  the  exchange  is 
higher  than  at  what  you  sold  it.  That  has  been  the  gen- 
eral tendency  of  the  country. 

Q.  Has  this  rise  in  prices  been  accompanied  by  a  rise 
in  wages,  expressed  in  Nicaraguan  currency? 

A.  Well,  wages  have,  as  a  rule,  increased  more  or 
less  in  the  same  proportion.  The  wages  of  government 
employees  have  not  increased  quite  so  fast.  The  wages 
of  labor  have  increased  even  more  in  proportion,  because 
labor  has  been  short  in  the  country  on  account  of  the 
continual  wars. 

Q.  Has  there  been,  since  1897,  a  large  increase  in  ex- 
ports of  merchandise  from  Nicaragua?  Has  there  been, 
since  1897,  an  increase  or  decrease  of  imports  into  Nica- 
ragua? 

A.  Excepting  this  year,  that  is,  1911,  where  the  impor- 
tation has  been  exceptionally  large,  there  has  been  a  de- 
crease in  the  volume  of  imports  and  also  in  the  exports, 
during  the  last  fifteen  years.  In  1892,  we  had  250,000 
quintals  of  coffee  exported.  In  1902,  we  had  320,000  quin- 
tals of  coffee  exported,  but  all  the  other  years  have  been 
below  200,000.  In  reference  to  importation,  I  dare  say 
that  importations  have  not  been  large  for  the  last  fifteen 
years  on  account  of  the  unsettled  condition  of  Nicaragua. 


107 

The  largest  importations  here  were  in  1891  and  1892.  We 
had  very  high  prices  for  coffee  at  that  time.  Coffee 
dropped  badly  in  1895,  so,  of  course,  there  was  less  money 
to  spend  in  the  country.  The  determining  features  in 
the  Nicaraguan  trade  were  the  dropping  of  the  coffee 
market  and  the  unsettled  condition  of  the  country.  The 
drop  in  silver  caused  also  a  great  depression  in  the  coun- 
try. A  man  who  had  sold  a  pound  sterling,  used  to  get 
six  to  seven  silver  dollars  for  it  in  1892;  and  when  he 
had  to  pay  back  that  money,  or  buy  sterling,  he  had  to 
pay  $16  for  it.  This  was  far  too  much,  considering  only 
four  years '  time.  The  country  up  to  1893  was  on  a  silver 
basis.  The  first  issue  of  paper  was  in  1894  or  1895. 

Q.  What,  in  your  opinion,  should  be  the  rate  of  con- 
version of  the  present  paper  currency  of  Nicaragua  into 
gold,  if  such  conversion  is  desirable,  or  is  to  be  made! 

A.  Well,  we  were  working  until  June  last  with  a  rate 
of  from  11  to  12,  and  I  favor  and  hope  for  a  rate  of  10. 
I  also  believe  that  would  be  the  popular  rate. 

Q.  What  would  be  the  effect  of  the  rate  of  conversion 
suggested  by  you  upon  prices  of  merchandise  ? 

A.  The  prices  of  imports  would  be  so  much  lower, 
and  the  poorest  part  of  the  country  would  have  a  big 
benefit  by  it.  The  poor  would  benefit  by  a  lower  price 
of  imports  with  an  exchange  of  10.  In  regard  to  ex- 
ports, the  most  important  article  of  exportation  is  coffee ; 
it  has  now  a  very  high  price,  and  the  exporters,  of  course, 
would  be  affected  a  little  with  the  lower  exchange,  with- 
out doubt;  but  they  can  afford  much  more  to  stand  that 
little  less  than  the  whole  of  the  country,  which  uses  the 
iinported  goods.  If  exchange  was  reduced,  we  should  re- 
duce wages.  I  think  the  planters  will  find  it  possible  to 
reduce  wages,  although  the  supply  of  labor  is,  at  present, 
rather  short,  because  the  labor  from  the  neighboring 
countries,  as  Honduras  and  Salvador,  is  paid  at  a  lower 
rate  and,  therefore,  will  come  in,  and  the  prosperity  of 
the  country  will  increase  the  laboring  population. 


108 

Q.  What  would  be  the  effect  of  a  fixed  rate  upon  the 
movement  of  foreign  capital  into  Nicaragua? 

A.  I  think  a  stable  rate  of  exchange  will  enormously 
encourage  the  employment  of  fresh  capital  in  Nicaragua. 
Whenever  people  from  the  outside  have  applied  for  in- 
formation in  regard  to  the  development  of  the  country, 
they  are  always  deterred  by  the  fluctuating  exchange. 

Q.  Would  the  issue  of  a  paper  currency  adequately 
protected  by  gold  funds  be  an  acceptable  substitute  for 
the  present  fluctuating  paper  circulation? 

A.  The  paper  rate  can  always  be  kept  at  the  par  fixed 
by  reducing  or  increasing  the  paper  circulation  so  as  to 
keep  that  par.  I  would  rather  say  you  can  always  keep 
a  certain  par  by  decreasing  the  circulation — for  instance, 
the  par  of  12.  My  idea  is  that  it  might  be  kept  with  a 
circulation  of  36,000,000  in  bills. 

Q.  If  a  gold  standard  is  to  be  introduced  into  Nica- 
ragua, what  should  be  the  value  of  the  gold  unit — should 
it  correspond  approximately  to  the  franc,  the  shilling, 
the  two-shilling  piece,  the  old  gold  peso,  the  present  Mex- 
ican peso,  or  the  dollar  of  the  United  States  ? 

A.  I  suppose  the  natural  unit  here  is  the  dollar.  I 
would  prefer  a  circulation  of  paper  dependent  on  gold. 
I  care  nothing  for  silver  except  for  small  fractional  cur- 
rency. I  have  no  objection  to  nickel  being  used  for  the 
very  small  coins.  I  would  not  like  paper  for  denomina- 
tions of  less  than  a  dollar.  For  amounts  below  the  dollar, 
I  would  prefer  silver  and,  at  the  bottom,  nickel  coin. 

Q.  What  are  the  fluctuations  in  exchange  due  to  sea- 
sonal movements  of  merchandise  ? 

A.  Exchange  fluctuates  yearly  with  the  coffee  crop. 
The  drawing  for  coffee  begins  early,  but  the  crop  moves 
from  December  to  March. 

Q.  Is  exchange  normally  in  favor  of  either  the  sea- 
board or  the  interior;  or  in  favor  of  the  large  towns  or 
the  interior? 

A.  There  is  no  premium  or  discount  in  the  internal  ex- 
changes. 


109 

Q.  What  is  approximately  the  present  rate  of  ex- 
change between  Nicaragua  and  London  and  Nicaragua 
and  New  York,  when  the  currency  of  Nicaragua  is  re- 
duced to  a  gold  basis  1 

A.  At  present,  there  is  no  charge  for  gold  exchange 
between  Nicaragua  and  London  and  New  York.  It  is  all 
included  in  the  exchange  quoted.  The  cost  of  transfer- 
ring money  between  Nicaragua  and  New  York  and  Lon- 
don, I  put  roughly  at  iy2  per  cent. 

Additional  Remarks. 

I  think  $1,000,000  in  gold  expended  in  buying  up  paper 
would  bring  the  exchange  from  16  and  17  to  10.  A  fourth 
or  a  fifth  of  the  coffee  crop  belongs  to  the  foreign  houses 
and  does  not  enter  the  exchanges,  and  therefore  the  effect 
of  the  coffee  export  trade  is  overrated  by  some.  We  had 
13,000,000  of  notes  during  the  past  government  and  the 
exchange  went  up  to  10.50.  With  this  new  government, 
we  came  up  to  36,000,000,  and  the  exchange  was  not  over 
12.  That  is  the  fact.  Now,  what  is  the  cause?  The  cause 
may  be  a  complex  cause.  First  of  all,  it  is  the  confidence 
in  the  new  government.  Secondly,  it  is  the  amount  of 
gold  and  credit  put  in  circulation  by  the  capitalists. 

7. — STATEMENT  OF  ANGEL  CALIGARIS,  COFFEE  PLANTER, 
DECEMBER  20,  1911. 

I  am  the  owner  of  extensive  coffee  estates,  on  which 
there  are  approximately  half  a  million  coffee  trees.  The 
yearly  crop  is  from  25,000  to  30,000  quintals.  I  buy  and 
sell  drafts  and  also  provide  current  capital  to  coffee 
growers  and  take  coffee  in  liquidation  of  my  advances. 
I  sometimes  advance  money  for  the  purchase  of  coffee 
estates,  leaving  the  money  out  possibly  for  five  years, 
and  the  rate  of  interest  I  charge  depends  upon  the  rate 
of  exchange  and  the  price  of  coffee.  The  repayments 
are  usually  made  in  coffee  at  a  price  fixed  at  the  time 
of  the  loan.  Then  I  lend  to  coffee  growers  who  have 


110 

good  credit  yearly,  the  loan  being  similarly  repayable  in 
coffee  at  a  price  determined  at  the  time  of  making  the 
loan.  Planters  usually  either  borrow  from  me  or  the 
banks. 

Up  to  six  or  seven  years  ago,  the  usual  practice  was 
to  lend,  at  the  commencement,  money  at  18  per  cent. 
The  loan  was  liquidated  in  coffee  at  the  current  market 
rates.  When  I  lend  now,  the  planters  have  to  deliver 
a  fixed  quantity  of  coffee  at  a  fixed  price.  I  have  never 
had  to  distrain.  If  the  planter  has  a  surplus  production, 
it  remains  at  his  disposal.  Eecently  1%  per  cent,  per 
month  is  the  usual  rate  on  which  advances  are  made  in 
coffee.  Just  at  present  it  is  a  little  lower  owing  to  ex- 
ceptional circumstances. 

The  banks  make  their  charge  of  l1/^  per  cent,  per 
month  on  a  gold  basis.  I  lend  on  a  paper  basis.  The  rate 
of  interest  on  a  paper  basis  is  at  present  lower  than  that 
on  a  gold  basis.  The  rate  on  gold  loans  is  higher  be- 
cause gold  is  in  greater  demand.  I  do  not  make  advances 
on  or  deal  in  Matagalpa  coffee. 

If  selling  $2,500,000  gold  here  would  reduce  exchange 
down  to  1,000,  it  would  be  necessary  then  to  convert  bills 
in  order  to  have  $4,500,000.  With  $1,700,000  in  gold,  the 
government  could  begin  paying  drafts  at  1,600,  and  lower 
the  rate  slowly  until  they  got  to  1,000.  In  that  case 
only  twenty  millions  of  bills  would  remain  in  circulation. 
Therefore,  there  would  be  no  more  necessity  of  any  gold 
to  maintain  the  rate  fixed  at  1,000.  I  base  my  calcula- 
tion on  the  theory  that  there  is  no  banking  issue — with- 
out taking  the  bank  into  account.  Mr.  Palazio's  opinion 
is  that  twenty  millions  of  paper,  that  is  in  circulation,  is 
hardly  sufficient  for  the  circulation  of  the  country,  taking 
into  account  the  amount  of  business  that  is  done  here. 
It  would  take  from  $1,400,000  to  $1,500,000  to  reduce  the 
rate  to  12. 

I  estimate  the  amount  of  paper  now  in  circulation  at 
45,000,000.  This  is  from  official  data  and  accessible  here 
in  the  Ministry.  I  know,  as  a  matter  of  fact,  that  these 


Ill 

data  are  correct,  because  I  have  control  over  them.  The 
issues  of  bills  by  Zelaya  and  Madriz  are  all  of  a  certain 
amount,  of  which  the  record  is  in  the  Treasury,  and  the 
records  are  being  consulted  from  which  I  calculated  the 
amount.  Of  course,  a  certain  amount  must  be  deducted 
for  the  loss  and  tear  of  the  bills.  I  estimate  the  loss 
through  accidental  destruction  and  wear  at  3,000,000. 
I  have  no  reason  to  distrust  the  official  figures  of  incinera- 
tion. 

My  idea  is  that  it  would  be  very  suitable  that  the 
government  should  reduce  exchange  by  a  decree.  Under 
that  decree,  the  government  is  obligated  to  recognize  bills 
at  1,200.  It  cannot  raise  the  rate  because  it  is  pledged 
to  recognize  1,200.  Before  that  decree  was  issued,  they 
had  promised  to  lower  it  to  1,000.  I,  therefore,  think 
the  government  is  morally  obliged  to  fulfil  it.  The  gov- 
ernment is  under  no  moral  obligation  to  lower  exchange 
beyond  1,000,  because  it  would  not  suit  the  general  inter- 
ests of  the  country.  These  references  to  a  rate  of  1,000 
were  merely  declarations  of  public  officials  in  private 
conversation.  I  think  this  opinion  is  held  by  the  ma- 
jority, especially  among  the  poorer  classes. 

When  exchange  has  reached  1,000,  by  buying  up  all 
bills  beyond  20,000,000,  any  further  currency  required 
should  be  obtained  through  the  agency  of  a  bank  which 
would  issue  additional  notes  against  gold.  To  maintain 
those  notes  at  par  would  require  a  reserve  of  40  per  cent, 
in  gold,  or  what  is  easily  turnable  into  gold.  The  pres- 
ent necessities  of  the  Eepublic  are  not  for  gold  coin ;  the 
demands  of  the  people  would  be  for  drafts  rather  than 
for  gold  coin.  Two  classes  of  money  are  needed  here — 
paper  currency  and  drafts.  On  general  principles,  it  is 
preferable  that  there  be  one  bank,  more  necessarily  a 
state  bank,  and  other  banks  might  be  allowed  whose 
credit  was  unimpeachable. 

I  will  send  to  you  my  project  for  a  bank,  and  will  also 
put  in  a  paper  refuting  the  coffee  planters '  argument  for 
a  2,000  exchange. 


112 

8. — STATEMENT  or  AD!N  SAENZ, 
DECEMBER  22,  1911. 

I  am  a  general  import  merchant  and  have  been  in 
that  business  for  thirty  years.  I  import  from  England, 
the  United  States,  Germany,  France  and  Italy.  I  sold 
my  business  forty  months  ago  to  a  Mr.  Solomon.  I  have 
had  to  pay  forced  contributions  in  the  times  of  Zelaya 
and  Madriz,  although  I  never  mixed  in  politics.  On  one 
occasion  I  was  assessed  $50,000,  but  I  paid  $7,500.  When 
I  sold  my  business  they  reduced  the  demand  to  $15,000, 
and  then  I  paid  only  half.  To  Zelaya,  I  had  to  pay 
two  contributions  of  $4,000  and  $5,000,  for  which  I  hold 
receipts.  I  have  also  made  other  contributions  many 
times  and  have  been  repaid.  At  one  time  I  was  even 
put  in  the  penitentiary.  The  contributions  were  always 
taken  from  the  conservative  party.  Zelaya  reimbursed 
only  certain  persons.  When  I  was  assessed  for  a  con- 
tribution of,  say,  $10,000,  I  got  a  receipt.  Then,  when  I 
found  the  government  was  in  want  of  money,  I  offered 
them  a  further  $10,000.  They  then  acknowledged  the 
whole  as  a  debt  of  $20,000,  which  they  agreed  should  be 
discharged  against  what  I  might  owe  for  customs,  and  I 
was  given  credit  for  that  sum  by  tendering  the  amounts 
due  from  me  on  customs  invoices,  until  the  amount  was 
satisfied. 

Silver  disappeared  from  circulation  about  fifteen  or 
sixteen  years  ago.  Some  made  their  contracts  in  current 
money  without  specifying  whether  paper,  silver  or  gold 
was  the  medium  to  be  employed.  At  the  beginning  of 
Zelaya 's  government  the  exchanges  were  still  calculated 
in  silver,  and  paper  money  then  was  at  a  discount  of 
about  10  per  cent,  in  silver.  The  exchange  was  then 
250  per  cent,  on  silver  and  300  on  paper,  expressed  in 
terms  of  gold.  Three  years  after  Zelaya 's  inauguration, 
silver  disappeared  from  circulation.  It  think  a  rate  of 
1,000  is  very  reasonable.  I  hope  you  will  receive  my 
festimony  as  that  of  an  absolutely  disinterested  person, 


113 

because  I  have  no  business  at  present  in  Nicaragua.  I 
have  sold  my  business  here  and  all  my  capital  is  in  gold, 
and  even  the  few  houses  which  I  possess  in  this  town 
I  rent  on  a  gold  basis  and,  therefore,  my  testimony  is 
disinterested  and  I  wish  to  set  forth  only  what  I  think  is 
best  for  the  people. 

Transactions  have  been  taking  place  here  in  the  con- 
fidence that  the  government,  as  it  had  promised,  would 
fix  exchange  at  1,000  and  keep  it  there,  and  I  want  you 
to  especially  consider  the  case  of  the  poor  people  in 
this  country,  who  are  suffering  greatly  from  the  high 
rate  and  the  fluctuations  of  exchange.  For  example,  a 
servant,  or  people  of  the  servant  class,  earn  here  30 
pesos  per  month,  which  is  equivalent  to  about  $2  gold, 
and  the  constant  fluctuations  cause  them  great  poverty. 
I  ask  you  in  the  name  of  the  poor  people  of  this  country 
not  to  pay  any  attention  to  the  discussions  in  the  papers 
by  interested  parties,  who  do  not  understand  what  they 
are  talking  about,  but  to  keep  in  mind  the  real  neces- 
sities of  the  people,  and  above  all  to  fix  exchange  as 
soon  as  possible  on  a  fixed  and  definite  basis,  whether  it 
is  2,000,  1,500  or  1,000,  as  long  as  it  is  done  promptly. 
It  is  true  that  there  are  several  persons  who  have  got 
a  great  deal  of  money  in  bills  which  they  have  extracted 
from  the  Treasury  by  illicit  means,  but  that  is  no  reason 
why  the  poor  people  who  have  earned  the  billetes  by 
their  own  work  should  suffer  because  of  four  or  five  in- 
dividuals who  have  acted  dishonestly  by  means  of  claims 
of  losses  they  had  suffered  during  the  revolution. 

Of  course,  it  would  suit  debtors  to  have  a  high  rate 
of  exchange,  but  on  the  other  hand  the  creditors  would 
lose,  because,  for  example,  people  who  have  done  business 
two  years  ago  on  a  basis  of  800,  or  a  year  and  a  half 
ago  on  a  basis  of  1,000,  will  only  receive  half  the  value 
they  had  given  when  they  received  their  money.  A  mer- 
chant can  never  protect  himself  against  this  rise  in  ex- 
change. I,  myself,  have  lost  on  this  exchange,  having 
calculated  my  merchandise  at  1,000,  and  then  afterwards 


114 

found  that  the  exchange  had  gone  still  higher,  because 
there  is  no  bank  here  where  one  can  buy  drafts  from 
day  to  day,  as  there  is  in  Gautemala,  which  buys  and 
sells  drafts  daily.  A  bank  is  very  necessary  in  Nic- 
aragua and  perhaps  a  private  bank  would  be  superior  to 
a  national  bank,  so  that  the  government  would  have 
nothing  to  do  with  it.  I  have  no  objection  to  the  bank 
being  privileged,  because  nowhere  is  there  a  bank  with- 
out similar  privileges. 

I  think  1,500  should  be  about  the  true  exchange.  In 
my  opinion,  if  you  would  issue  a  statement  saying  that 
the  government  is  going  to  establish  a  rate  of  1,000,  it 
will  make  exchange  immediately  drop  to  at  least  1,200. 
The  establishment  of  a  bank  and  the  sale  of  drafts  may 
keep  exchange  at  that  rate.  Your  mere  statement  will 
bring  exchange  down  to  1,200,  but  to  keep  it  there  it 
will  be  necessary  to  establish  a  bank  and  sell  its  drafts. 
This  would  depend  upon  the  form  in  which  the  bank  is 
established.  If  the  bank  which  is  established  issues  notes 
at  the  value  of  10  cents  gold  for  each  peso,  then  the  ex- 
change will  remain  fixed  at  1,000. 

I  think  the  railway  should  be  sold  and  the  tariff  fixed 
in  gold,  and  that  the  funds  so  derived  should  be  used  for 
calling  in  and  immediately  burning  the  surplus  notes. 
The  government  should,  under  no  circumstances,  issue 
any  more  notes.  I  cannot  give  any  information  as  to 
the  value  of  the  railway.  I  do  not  know  that  the  railway 
is  very  badly  managed.  The  government  has  no  need  to 
possess  it  and  it  does  not  matter  who  owns  the  railway, 
so  long  as  it  is  well  managed  and  the  public  is  satisfied. 
In  the  case  of  the  excise  duties  the  only  thing  that  is 
lacking  is  an  effective  control  of  the  illicit  manufacture 
of  liquor  and  smuggling.  Owing  to  the  very  high  rate  of 
exchange,  what  the  government  receives  in  effect  is  very 
little.  To  obviate  that  difficulty,  I  think  the  government 
should  fix  the  price  at  which  it  sells  to  the  retailers  and 
order  the  retailers  to  sell  at  a  fixed  price  also,  with  the 


115 

idea  of  allowing  the  retailers  to  make  a  profit  of  from 
10  to  15  per  cent. 

Bills  are  incinerated  in  the  presence  of  the  Treasurer- 
General  and  two  merchants,  of  which  I  have  sometimes 
been  one.  When  I  have  had  occasion  to  be  one  of  them, 
I  have  counted  every  bill  myself.  If  I  had  to  act,  I  would 
act  on  the  assumption  that  the  notes  alleged  to  be  burned 
had  been  burned.  The  two  merchants  chosen  for  this 
purpose  have  always  been  men  of  high  character.  If 
there  was  any  mistake,  it  would  be  an  inadvertence  and 
not  intentionally. 

The  general  opinion  is  that  Zelaya  issued  2,000,000 
in  50-dollar  bills  and  Madriz  5,000,000  in  5-dollar  bills 
manufactured  out  of  country  paper.  I  think  there  have 
been  some,  but  not  very  many  counterfeit  bills  out  of 
country  paper.  The  forged  bills  appeared  about  eighteen, 
months  ago.  Dates  were  fixed  and  extended  for  the  re- 
ceipt of  the  country-made  bills,  the  dates  being  prolonged 
sometimes  because  the  government  had  not  good  paper 
to  give  in  exchange.  We  do  not  see  the  country-made 
notes  in  circulation  at  present.  You  may  treat  them 
more  or  less  as  a  negligible  quantity. 

9. — STATEMENT  OF  JACOBO  TEFELS, 
December  22,  1911. 

I  have  come  here  at  the  request  of  my  father,  who  is 
ill.  I  am  a  banker,  merchant  and  coffee  grower.  Our 
principal  business  is  banking.  We  possess  several  coffee 
estates,  upon  which  we  grow  coffee  and  export  it.  Our 
estates  are  south  of  Managua.  The  normal  rate  of  inter- 
est in  this  country  on  good  security  is  between  12  and 
18  per  cent.  We  lend  to  anybody  that  gives  sufficient 
security.  It  does  not  matter  to  us  what  sort  of  security 
is  given  so  long  as  it  is  good.  The  usual  security  is  two 
signatures  or  mortgages.  Loans  are  exclusively  in  gold, 
for  many  years.  It  is  difficult  for  me  to  say  at  what  rate 
exchange  should  be  fixed,  because  I  think  it  will  have  to 


116 

be  fixed  according  to  the  necessities  of  the  case.  Some 
people  want  a  low  exchange,  because  they  hold  a  large 
quantity  of  the  bills.  I  personally  think  the  low  rate  of 
exchange  will  be  good  for  the  country,  but  that  depends 
upon  the  necessities  of  the  country  more  than  on  my  pri- 
vate wish.  It  depends  also  upon  the  amount  of  gold  that 
the  country  will  get,  and  the  foundation  of  the  bank,  and 
also  the  fact  of  the  bank  having  a  sufficient  fund  to  re- 
spond to  the  necessities  of  commerce.  I  cannot  express 
an  opinion  on  that  point,  because  I  do  not  know  suffi- 
ciently, and  because  I  am  not  aware  of  the  amount  of 
bills  in  circulation,  and  it  would  depend  upon  the  amount 
of  bills  at  present  in  circulation.  There  are  several  re- 
ports in  regard  to  the  amount  of  bills  in  circulation,  but 
there  is  no  object  in  stating  the  amount,  because  there  is 
no  reason  to  believe  in  the  truth  of  those  reports  and, 
therefore,  it  is  not  worth  while  repeating  them.  I,  my- 
self, cannot  express  an  opinion  upon  the  amount  of  bills 
in  circulation.  People  usually  take  the  circulation  at 
about  50,000,000  and  55,000,000  pesos.  There  are  rumors 
that  Zelaya  made  irregular  issues. 

Exchange  in  May  of  this  year  was  about  1200.  We 
need  drafts  very  badly  to  pay  for  our  merchandise,  of 
which  we  have  imported  a  great  deal,  and  there  is  also  a 
heavy  demand  for  gold.  I  do  not  think  that  this  would 
be  sufficient  to  lower  exchange,  but  that  it  might  maintain 
exchange  at  the  present  level,  between  1500  and  1800.  I 
think  that  the  immense  amount  of  money  in  circulation 
is  enough  to  keep  exchange  high.  Besides,  it  is  not 
12,000,000  pesos  that  have  been  issued  since  May,  but 
24,000,000.  If  that  24,000,000  were  retired,  exchange 
would  be  brought  back  to  the  original  level,  but  only  tem- 
porarily. Inasmuch  as  when  the  circulation  was  only 
12,000,000,  exchange  was  1,000,  how  can  it  be  expected 
when  there  is  double  that  amount  of  paper  in  circulation 
exchange  would  not  be  higher?  The  quantity  of  bills  is  so 
great  that  it  is  impossible  to  keep  exchange  at  1,000. 

I  would  not  dispute  theoretically  if  such  amount  of 


117 

the  paper  was  retired  as  to  bring  the  amount  to  that  fig- 
ure which  existed  when  exchange  was  1200 — that  that 
would  be  the  correct  exchange.  But,  in  my  opinion,  in 
view  of  the  special  circumstances,  that  rate  could  not  be 
maintained,  because  the  importations  have  been  so  great 
that  there  will  be  a  very  large  demand  for  gold  drafts. 
When  the  par  of  12  had  been  reached  owing  to  the  special 
circumstances,  I  think  it  might  take  nearly  $1,500,000  of 
gold  to  meet  demands  on  the  foreign  exchange. 

I  have  been  a  banker  for  fifteen  years  in  Managua. 
I  attribute  these  changes,  first,  to  new  issues  of  bills  and 
also  to  difficulties  in  the  exportation  of  agricultural  prod- 
ucts and  to  the  bad  crops.  My  idea  is  that  the  foundation 
of  a  bank  which  would  have  sufficient  capital  to  respond 
to  the  necessities  of  the  merchants  would  be  very  bene- 
ficial to  the  country.  My  opinion  is  that  the  bills  should 
be  called  in  at  the  lowest  rate  possible,  and  that  the  best 
means  to  get  more  gold  for  the  bills  is  to  increase  the 
value  of  the  bills.  I  think  the  bills  should  be  called  in  at 
the  rate  of  1,200.  It  is  to  the  general  interest  to  try  to 
arrive  at  the  exchange  of  1,200,  in  the  commercial  and 
agricultural  interests. 

10. — STATEMENT  OF  MB.  HERBERT  I.  THOMPSON,  OF  LABERN 

&  THOMPSON. 

December  22, 1911. 

I  am  engaged  exclusively  in  the  import  business.  My 
business  is  entirely  wholesale.  It  has  been  on  the  credit 
system,  on  three  months7  time,  payable  in  billetes.  Lately, 
it  has  been  impossible  to  do  business  in  that  way.  We 
obtain  credit  in  Europe,  and  we  have  connections  in  Man- 
chester, London,  New  York  and  elsewhere.  Bates  of  in- 
terest here  are  higher  than  abroad.  On  the  best  security 
they  are  10  to  12  per  cent.  Imports  of  merchandise  have 
lately  been  rather  heavy.  The  reason  for  heavy  importa- 
tions was  that  we  found  that  business  had  revived  with 
the  advent  of  the  present  government.  We  were  not  in- 


118 

fluenced  by  any  expectation  that  the  import  duties  might 
be  reduced.  We  had  never  had  any  unpleasant  experi- 
ences in  the  Custom  House.  We  have  been  very  fairly 
treated,  indeed,  except  that  under  Zelaya  a  great  many 
concessions  were  made  which  were  inimical  to  honest 
merchants.  It  was  a  way  of  rewarding  political  services. 

Our  recent  imports  we  have  on  hand  and  cannot  sell 
under  present  conditions.  Our  sales  have  been  below  the 
average  for  the  last  few  months,  especially  credit  sales. 
Our  credit  and  cash  sales  have  been  in  the  proportion  of 
about  one-third  cash  and  two-thirds  credit. 

On  account  of  having  sold  goods  on  credit  for  bills  or 
national  currency  at  rates  much  lower  than  the  rate  rul- 
ing to-day,  we  have  incurred  heavy  losses,  and  expect 
grave  loss  in  future  if  present  high  rates  continue.  I 
think  the  government  should  be  obliged  to  redeem  its 
paper  at  not  over  1200.  But  before  1200  was  mentioned 
as  the  official  rate,  we  were  led  to  suppose  that  the  rate 
would  be  1,000.  I  would  rather  not  suggest  how  the  gov- 
ernment could  meet  obligations  at  1200  when  exchange 
at  present  is  1600.  The  date  of  my  last  transaction  was 
December  15th,  on  which  date  we  paid  1600  for  a  sight 
draft  on  New  York.  I  consider  exchange  should  be 
brought  down  to  1200  by  any  means,  such  as  taxation  or 
otherwise,  but  I  would  prefer  that  it  should  be  done  by  a 
loan,  preferably  a  foreign  loan.  I  do  not  think  there  is 
any  objection  here  to  paper  money,  if  it  is  good.  I  am 
quite  indifferent  as  to  whether  the  unit  should  be  $1  or 
50  cents. 

I  import  principally  from  the  United  States  and 
Europe.  No  alteration  of  the  exchange  would  decrease 
the  exportations.  Everything  grown  in  the  country  is  in 
great  demand  and  will  be  exported. 

The  establishment  of  a  bank  here  would  be  of  great 
benefit  to  commerce.  No  merchants  keep  a  deposit  account 
in  paper  currency.  No  checks  are  used  in  this  country.  In 
purchasing  drafts,  the  vendor  frequently  prefers  to  re- 
ceive an  I.  0.  U.  rather  than  be  troubled  with  a  bundle 


119 

of  dirty  bills.  We  have  to  keep  all  our  bills  in  our  safe 
until  we  dispose  of  them.  Important  firms  of  high  stand- 
ing issue  these  I.O.U's,  which  pass  current.  These  are 
generally  for  large  amounts.  We  are  only  too  glad  to 
cash  these  I.O.U's  in  preference  to  holding  the  dirty 
equivalent.  I  think  people  would  take  kindly,  as  in  Sal- 
vador, to  a  system  of  check  payments  with  sound  bank- 
ing. I  have  spent  seven  years  in  business  in  Salvador, 
and  the  check  system  is  very  much  appreciated  by  the 
public. 

I  wish  to  impress  upon  the  Commissioners  the  incon- 
venience of  the  present  high  rates  of  exchange.  Printed 
calico  of  the  cheapest  quality  made  in  Lancashire  cannot 
be  profitably  retailed  to-day  at  less  than  90  cents  paper 
for  33  inches,  English  measure,  although  the  duty  on  this 
article  was  reduced  by  government  decree  on  September 
27, 1910,  from  56  to  30  cents  gold  per  kilo.  An  amount  of 
perhaps  50  yards  makes  a  kilo.  Five  years  ago  the  article 
was  sold  at  30  cents,  and  it  is  now  90  cents.  Wages  have 
not  gone  up  in  anything  like  that  proportion. 

I  think  people  are  turning  their  capital  into  gold  and 
removing  it  from  the  country.  Under  a  fixed  exchange, 
there  will  be  a  profitable  field  for  investment  and  capital 
will  be  attracted  back.  I  think  land  might  be  taxed  if 
more  money  is  needed,  in  spite  of  the  great  unpopularity 
which  would  attach  to  a  land  tax.  A  house  tax  or  any 
direct  tax  would  be  unpopular.  The  land  is  in  the  hands 
of  rich  people  who  would  resent  a  tax. 

11. — STATEMENT  OF  DON  F.  ALFREDO  PELLAS,  PLANTER 
AND  CAPITALIST,  DECEMBER  29,  1911. 

I  represent  Messrs.  Amsinck  &  Company,  of  New 
York.  I  am  engaged  in  sugar  planting  and  other  in- 
dustries. 

In  regard  to  the  rate  of  exchange,  I  should  say  that 
it  should  be  about  1,000.  Most  of  the  issues  were  made 
under  the  rate  of  1,000.  I  favor  this  rate  for  the  benefit 


120 

of  the  people,  who  should  be  allowed  to  conserve  the 
capital  they  have  in  this  form.  If  exchange  should  be 
fixed  at  1,500  or  2,000,  the  holders  of  the  notes  would 
lose  half  of  their  capital.  I  am  interested  in  the  pro- 
duction of  coffee,  sugar  and  gold.  An  exchange  rate 
of  2,000  would  make  wages  very  high,  at  least  nominally. 
If  the  rate  of  2,000  is  to  be  advocated,  why  should  it  not 
be  5,000?  I  think  it  better  to  take  a  mean  rate.  There 
is  an  opening  for  the  extension  of  the  use  of  paper  at 
Bluefields.  Bluefields  does  not  now  use  paper ;  the  for- 
eigners there  will  not  have  it.  Now,  if  it  requires  4,000,- 
000  or  5,000,000  pesos  in  Bluefields  to  pay  duties  and  other 
government  charges,  why  should  not  this  amount  of  paper 
be  found  there?  If  the  net  stock  in  the  western  part  of 
the  country  is  reduced  to  40,000,000  pesos,  exchange  will 
be  reduced  to  1,000.  In  view  of  the  present  demand  for 
currency,  a  circulation  of  42,000,000  on  the  Pacific  Coast 
will  not  be  too  much.  I  would  not  oblige  people  to  take 
the  billetes  at  Bluefields,  but  would  require  them  to  be 
paid  for  customs,  and  customs  employees  to  be  paid  in 
this  manner.  This  would  put  it  in  circulation  and  others 
would  take  it  without  being  compelled  to  by  law.  The 
Bluefields  merchants  are  mistaken  in  sticking  to  silver. 
It  would  be  better  for  them  to  use  paper  than  to  import 
soles  to  make  their  payments.  The  government  made  a 
mistake  in  requiring  duties  to  be  paid  in  soles.  It  was 
the  result  of  a  private  speculation  of  Zelaya 's.  Mr. 
Solomon  built  a  wharf,  in  order  to  handle  goods  before 
they  went  to  the  old  custom  house,  and  got  a  fixed  charge 
on  the  packages  handled.  Zelaya  got  one-third.  When 
the  merchants  protested  and  the  privilege  was  taken 
away,  Mr.  Solomon  had  to  have  compensation.  Zelaya 
changed  the  standard  of  payment  from  paper  to  silver 
about  1905,  thereby  increasing  duties  about  50  per  cent., 
in  order  to  get  good  money. 

In  my  opinion,  the  people  would  accept  paper  in  Blue- 
fields  if  it  was  good.  It  is  much  more  convenient  than 
silver  in  making  shipments  to  the  plantations.  We  pay 


121 

$25,000  to  $30,000  a  week  on  our  sugar  plantations.  Al- 
ready the  nickel  coins  are  being  exported  to  Honduras, 
Salvador,  and  elsewhere.  In  my  opinion,  silver  disap- 
pears from  circulation  by  hoarding.  Gold  coin  would 
also  tend  to  disappear.  Costa  Eica  for  a  time  had  gold 
colones  in  circulation,  but  it  was  disappearing,  and  they 
issued  notes.  We  might  put  in  $200,000  in  gold  and  it 
would  soon  disappear. 

A  high  exchange  would  have  a  very  serious  effect 
upon  the  mercantile  community.  Messrs.  Amsinck  & 
Company  have  large  obligations  due  them  which  could 
not  be  paid  with  exchange  at  1,500  to  2,000.  Many  of 
their  debtors  are  already  backward  in  their  payments. 
I  should  say  there  was  already  overdue  to  people  whom 
I  represent  in  New  York,  London,  Amsterdam,  Italy  and 
elsewhere  $150,000  to  $200,000,  and  that  the  obligations 
in  the  general  market,  including  those  to  my  clients, 
would  amount  to  $400,000  to  $500,000.  If  two  or  three 
months  pass  without  the  settlement  of  some  of  these 
claims,  it  will  be  necessary  to  press  them.  It  is  usual, 
even  under  normal  conditions,  for  merchants  to  demand 
more  than  the  due  time  on  their  obligations.  I  open  a 
credit  for  a  man  with  them  and  authorize  him  to  draw 
against  it.  If  there  are  failures,  it  will  be  the  importers 
who  will  fail.  The  retail  shops  will  loss  less,  because 
they  sell  for  cash.  Goods  are  generally  sold  at  about  six 
months'  time. 

The  general  expectation  has  been  that  exchange  would 
fall.  Merchants  calculated  250  points  above  the  market 
in  fixing  their  prices  when  exchange  was  above  1,200,  but 
the  actual  rise  was  400  and  they  suffered  losses.  After 
the  retirement  of  Zelaya,  everyone  was  anxious  to  do 
business  and  gave  heavy  orders.  They  knew  of  the  de- 
cree for  the  issue  of  15,000,000  billetes,  but  the  news  of 
the  loan  from  the  United  States  encouraged  them  and 
they  thought  that  exchange  would  come  down  to  800  or 
to  700. 

Orders  for  the  new  currency  notes  went  from  Messrs. 


122 

Amsinck  &  Company,  through  me.  Under  Madriz,  I  or- 
dered 15,000,000  pesos.  Of  recent  issues,  my  recollection 
is  as  follows: 

1909,  under  Zelaya. 

In  notes  for  50  dollars,  made  by  Waterlow,  2,000,000 
Made  in  California 500,000 

Under  Madriz. 

Made  in  this  country,  in  5-dollar  notes 5,000,000 

Made  by  the  American  Bank  Note  Co 15,000,000 

Under  Estrada. 

Made  by  the  American  Bank  Note  Co 15,000,000 

Under  Diaz. 

Made  by  the  American  Bank  Note  Co 10,000,000 

Prior  to  1909,  the  circulation  was  12,000,000  pesos, 
but  was  increased  during  1909  and  1910  to  19,000,000 
pesos.  The  last  order  through  the  American  Bank  Note 
Company  was  telegraphed  by  Sandino,  unknown  to  me. 
Estrada  was  in  Washington  at  the  time.  They  were  in 
such  a  hurry  that  they  made  the  temporary  issues  with- 
out waiting  for  the  American  Bank  Note  Company,  but 
afterwards  called  them  in  and  burned  them. 

I  would  favor  reducing  the  amount  of  paper  by  10,- 
000,000  pesos  by  means  of  a  loan  or  by  taxation.  It 
could  be  done  by  a  change  in  the  customs  duties,  which 
are  now  collected  at  an  exchange  of  650.  I  should  say 
fix  it  at  1,000  to  1,200.  The  people  do  not  feel  it,  be- 
cause the  exchange  would  fall  with  the  increase  of  duties. 
The  saving  could  then  be  used  to  reduce  the  billetes.  A 
certain  amount  of  the  loan  should  be  used  in  reducing 
the  circulation.  There  should  also  be  a  reduction  of 
expenses,  like  putting  in  the  surgeon's  knife.  I  would 
also  change  the  liquor  law.  The  country  formerly  got 
$600,000  or  $700,000  a  year  gold  from  the  sale  of  liquor. 
By  Sunday  closing  and  other  measures,  they  have  re- 
duced consumption  one-half.  Last  year  they  did  not  have 
enough  liquor,  the  shortness  in  the  crop  being  due  to 
war  and  other  disturbances.  I  think  there  will  be  enough 


123 

next  year.  I  am  the  largest  producer,  but  it  it  quite 
enough  to  make  payment  to  the  producer  at  1.20  pesos, 
provided  exchange  is  at  1,200.  I  would  give  a  license  to 
anybody  who  applied.  It  pays  me  to  sell  for  1.20  pesos, 
because  it  is  a  by-product,  but  it  does  not  pay  much  to 
the  smaller  people.  The  government  will  not  need  to 
import  if  they  keep  strictly  to  the  present  method  of  en- 
forcing the  laws.  The  amount  of  2,000,000  liters  will  be 
enough.  If  the  law  were  relaxed,  there  would  be  a  sale 
for,  perhaps,  2,500,000  liters.  If  the  price  to  retailers 
were  steady  at  5  pesos,  it  would  reduce  consumption,  but 
would  increase  revenue.  It  would  be  better  to  remit  the 
matter  to  a  company,  in  order  to  stop  contraband  con- 
tracts. The  government  should  take  the  excess  profits, 
or  divide  with  the  company  half  and  half,  or  the  govern- 
ment should  take  all  above  a  fixed  part. 

Under  the  present  system,  if  the  retailer  of  powder 
is  nominated,  he  must  have  the  approval  of  the  govern- 
ment. I  would  favor  having  a  company  distribute  it. 
Even  under  the  present  system,  anybody  can  import  re- 
volvers, subject  to  the  payment  of  the  duty  at  the  cus- 
toms house. 

In  respect  to  powder  and  shot,  there  is  a  greater  de- 
mand than  the  supply,  but  this  is  for  other  purposes  than 
revolution.  When  cartridges  are  obtained  for  revolution, 
they  come  from  the  outside. 

I  would  amalgamate  the  post-office,  telegraph  and 
telephone  under  one  competent  man  from  outside.  The 
railroad  also  would  give  a  splendid  revenue  if  trains  were 
run  more  frequently  and  faster. 

12. — STATEMENT  OF  MB.  NICOLAS  A.  DELANEY, 
JANUARY  2,  1912. 

I  would  prefer  the  exchange  fixed  at  once.  At  pres- 
ent, we  are  in  the  air.  Nobody  knows  where  we  are  and 
people  go  on  speculating  either  way  and  will  continue  to 
do  so.  I  have  no  objection  against  an  exchange  of  1,000, 


124 

1,200  or  1,250.  A  thousand  is  a  little  low.  Bills  are  not 
worth  1,000.  Some  of  them  have  been  put  out  at  an  ex- 
change of  1,400.  There  is  an  average  of  1,400.  I  do  not 
consider  that  the  possible  increase  in  the  gold  wages  of 
labor  would  be  a  serious  obstacle  for  us  in  fixing  the 
exchange  of  1,200.  Wages  in  some  cases  might  be  low- 
ered a  little  and  we  may  have  to  meet  a  small  increase  in 
gold  value.  This  year  wages  have  been  increased  largely 
and  are  being  daily  increased.  This  country  has  been 
much  retarded  by  the  Zelaya  administration.  It  has  been 
at  a  standstill  for  practically  seventeen  years.  There 
might  be  ten  times  as  much  coffee  grown  as  is  now  grown. 
The  land  is  there  and  the  labor  is  there.  Under  the  law 
of  1894,  indentured  laborers  could  be  forced  to  fulfil  their 
contracts.  We  are  told  that  this  law  no  longer  exists. 
We  have  a  suggestion  for  restoring  practically  the  law 
of  1894,  which  was  favorably  received  and  is  still  before 
the  government.  We  believe  that  the  coffee  growing  in 
Matagalpa  would  receive  a  death-blow  if  it  was  not  pos- 
sible to  enforce  a  law  relating  to  indentured  labor.  I 
think  that  Matagalpa  coffee  growers  would  accept  an 
exchange  of  1,200.  We  do  not  desire  to  propose  a  higher 
rate  than  1,200.  Eoughly  speaking,  33  per  cent,  of 
the  present  Matagalpa  crop  has  been  drawn  on,  and  the 
remainder  up  to  90  per  cent,  will  be  drawn  on  during 
the  next  two  months. 

In  regard  to  the  monetary  unit,  I  should  prefer  a  low 
unit  worth  about  50  cents  gold — because  the  transactions 
of  the  common  people  are  in  small  amounts. 

13. — LETTER   OF  ALBERTO   LOPEZ,   C. 

Chinandega,  25th  Dec.,  1911. 

Messrs.  C.  A.  Conant  and  F.  C.  Harrison, 

Managua. 

The  Minister  of  Finance,  Mr.  Pedro  E.  Cuadra,  has 
done  me  the  honour  to  ask,  in  your  name,  for  my  humble 
opinion  (either  in  writing  or  expressed  orally)  on  the 


125 

financial  question  at  present  engaging  your  attention.  I 
tender  both  to  the  Minister  and  to  yourselves  my  best 
thanks  for  the  unmerited  honour  shown  me,  and  only 
regret  not  having  sufficient  ability  to  shed  light  on  the 
present  critical  situation  through  which  Nicaragua  is 
passing.  But  as  a  Nicaraguan,  and  also  because  I  wish 
not  to  disregard  your  polite  invitation,  I  am  going  to 
state  my  frank  and  sincere  opinion. 

The  financial  problem  of  Nicaragua  looms  dark.  The 
excessive  rise  of  exchange  during  the  last  few  months  i& 
owing  to  many  causes,  viz. :  overissue  of  paper  currency, 
uncertainty  as  to  the  exact  amounts  issued,  acknowledge- 
ment by  the  Government  of  its  liability  in  respect  to  large 
gold  debts  contracted  by  the  Revolution  of  October,  mal- 
versation of  the  public  money,  sudden  increase  of  im- 
ports, causing  disturbance  of  commercial  equilibrium, 
and  an  urgent  demand  for  drafts,  etc.,  etc.  One  of  the 
reasons,  too,  for  the  great  fluctuation  of  exchange  is  the 
speculation  which  has  taken  place  recently;  all  the  gold 
possible  is  bought  up  at  a  relatively  high  rate  in  order 
to  attract  sellers,  and  as  soon  as  there  is  a  scarcity  of 
drafts  and  the  importers'  need  becomes  acute,  the  de- 
mand exceeds  the  supply  and,  as  a  natural  consequence, 
exchange  rises  fabulously — to  our  just  alarm. 

There  are  other  causes  besides,  which  I  will  not  stop 
to  examine.  Let  us  cast  a  veil  over  the  wounds  of  our 
country  and  endeavour  to  apply  a  healing  balm  to  them. 

The  remedy,  in  my  view,  is  to  fix  exchange.  What  is 
lacking  (and  here  lies  the  most  difficult  part  of  the  prob- 
lem) is  the  adoption  of  proper  measures  for  obtaining 
this  result.  There  has  been  great  discussion  lately, 
through  the  public  press  and  privately,  over  this  point. 
Some  maintain  that  an  exchange  of  1,000  would  not  hurt 
agriculture,  while  others  say  that  by  fixing  exchange  high 
our  circulating  medium  could  be  redeemed  with  a  smaller 
sum  in  gold.  I  agree  with  both  views,  but  do  not  think 
that  the  rate  of  exchange  can  be  fixed  at  will,  inasmuch  as 
the  fluctuations  are  due  to  complex  and  grave  causes. 


126 

A  given  rate  might  be  maintained  while  there  was 
sufficient  gold  to  sell  at  that  rate,  but  once  the  supply  of 
gold  failed,  exchange  would  fluctuate  anew.  In  my  opin- 
ion, the  evil  is  not  in  the  higher  or  lower  rate  of  ex- 
change ;  I  think  that  by  reason  of  the  laws  of  finance,  and 
owing  to  the  causes  which  have  brought  about  the  present 
crisis,  our  circulating  medium  must  necessarily  seek  its 
rational  ratio  with  regard  to  gold.  This  rational  ratio 
will  be  found  and  will  fix  itself  once  a  banking  institution 
is  established  fit  to  control  speculation,  facilitating  at 
the  same  time  commercial  operations  by  buying  and  sell- 
ing drafts.  The  details  for  organizing  such  a  bank  should 
be  the  subject  of  your  special  study. 

To  resume,  I  think  that  the  aim  of  the  financial  ex- 
perts should  be  to  establish  a  fixed  rate  of  exchange,  or 
a  rate  liable  only  to  slight  fluctuations. 

With  the  expression  of  my  distinguished  considera- 
tion, I  am, 

Yours  truly, 
ALBEETO  LOPEZ,  C. 

14. — LETTER  OF  LUCIANO  GOMEZ,  FORMER  MINISTER  OF 
FINANCE. 

Honorable  Messrs.  Charles  A.  Conant  and 
F.  C.  Harrison,  Financial  Experts  of  the 
Republic  of  Nicaragua. 

Managua,  December  28,  1911. 
Dear  Sire : 

I  am  in  receipt  of  your  esteemed  letter  of  the  19th 
inst.  Having  taken  due  note  of  its  contents,  I  am  pleased 
to  reply. 

In  the  first  place,  I  thank  you  for  the  compliment  you 
pay  me,  even  though  it  be  unmerited.  I  am  certainly  not 
a  representative  merchant  nor  an  expert  in  the  banking 
business. 

The  constantly  changing  political  conditions  of  this 


127 

country  have  seen  me  figure  on  various  occasions  in  pub- 
lic posts. 

I  am  bound  to  say,  without  vanity,  that  those  were 
better  times,  for  the  country  then  throbbed  with  national 
life. 

Two  revolutions  during  the  year  '93,  the  Honduras 
war  of  '94,  and  the  revolution  of  '96,  which  caused  great 
expense,  and  other  evils  were  not  sufficient  to  set  the 
country  back  in  its  finances.  Owing  to  strict  fiscal  admin- 
istration, it  was  possible  to  pay  the  debts  arising  from 
these  wars  and  to  keep  current  payments  up  to  date; 
also  to  settle  the  question  of  the  English  loan  of  1886 
and  pay  the  coupons.  The  Government  of  that  time  ob- 
tained the  English  loan  on  onerous  terms  (at  73  per 
cent,  issue  and  6  per  cent  interest,  with  repayment  after 
thirty  years)  owing,  no  doubt,  to  the  poor  credit  enjoyed 
at  that  period  by  the  Republic. 

In  the  year  1896,  there  were  only  half  a  million  dollars 
national  currency  in  circulation,  exchangeable  at  sight  for 
silver,  and  paper  was  even  at  a  slight  premium.  The 
Diriamba  branch  of  the  railway  was  built,  which  cost  a 
considerable  sum,  and  still  there  remained  a  large  amount 
of  silver  dollars  in  the  Treasury. 

I  was  then  Minister  of  Finance,  and  fearing  that  an 
overissue  of  paper  money  might  bring  about  the  present 
deplorable  state  of  affairs,  and  in  the  desire  to  avoid  such 
a  catastrophe,  I  sent  abroad  for  the  plates  used  in  print- 
ing the  bills  with  the  intention  of  destroying  them.  But 
it  was  useless.  The  revolutionary  fever  had  taken  pos- 
session of  the  spirit  of  a  greater  part  of  the  Nicaraguans, 
who  never  rested  until  they  had  brought  about  the  pres- 
ent conditions. 

You  have  come  here  as  financial  experts  and  you  are 
undoubtedly  such  experts.  Everyone  has  faith  in  your 
ability  to  find  a  remedy  which  will  raise  the  Republic  out 
of  the  slough  and  re-establish  its  credit,  without  which  no 
country  can  be  respected  or  esteemed. 

You  are  well  aware  of  the  urgent  need  of  fixing  the 


128 

rate  of  exchange  with  regard  to  gold  so  as  to  put  an  end 
to  the  scandalous  speculation  which  is  so  much  favoured 
by  the  frequent  rise  and  fall  in  exchange. 

My  humble  opinion  in  this  matter  differs,  I  am  sorry 
to  say,  from  that  of  other  well-informed  persons,  but  it 
seems  to  me  just  and  right  to  fix  exchange  at  the  rate 
quoted  on  the  day  the  conversion  is  decreed,  thus  not 
damaging  nor  unduly  favouring  the  interests  of  either 
party. 

I  apprehend  that  the  abrupt  and  total  retirement  from 
circulation  of  paper  currency  would  have  a  disastrous 
effect  on  business  owing  to  reasons  which  you,  as  experts, 
can  well  understand. 

My  suggestion  is  that  simultaneously  with  the  adop- 
tion of  a  gold  standard  (at  a  fixed  rate  with  regard  to 
paper  money),  a  new  tax  be  created,  the  proceeds  of 
which  would  go  towards  the  slow  conversion  of  the  paper, 
thus  avoiding  the  disasters  which  would  invariably  fol- 
low the  sudden  and  total  retirement  of  the  national  cur- 
rency. By  doing  this  we  should  only  be  following  in  the 
footsteps  of  other  Spanish-American  countries  which, 
for  reasons  identical  to  our  own,  have  reached  an  equally 
deplorable  condition. 

Some  people  are  under  the  impression  that  you  have 
come  to  this  country  in  the  guise  of  philanthropists  sor- 
rowing for  our  misfortunes  and  desirous  to  remedy  them, 
and  though  I  cannot  feel  the  same  optimism  with  regard 
to  your  sentiments,  still  I  do  believe  you  to  be  educated, 
able  and  honourable  men,  and  feel  sure  that  whatever 
decision  you  may  adopt  in  regard  to  the  problems  con- 
fided to  your  expert  knowledge,  you  will  in  any  case  seek 
an  equitable  solution  in  the  best  interests  of  our  dear, 
unfortunate  country,  passing  over  the  claims  of  those 
who  are  not  yet  satisfied  with  the  damage  done. 

The  basis  of  the  prosperity  and  smooth  working  of 
public  business  is  peace,  but  it  must  be  peace  under  such 
conditions  that  hard-working  citizens  may  be  enabled  to 
enjoy  the  respect  of  authority  and  the  protection  of  the 


129 

laws,  and  not  be  subject  to  the  caprice  of  passions  which 
keep  society  in  a  state  of  constant  alarm. 

I  shall  have  the  pleasure  of  visiting  you  as  soon  as 
my  occupations  permit.  For  the  rest,  in  this  letter  I  have 
given  an  idea  of  my  opinions  such  as  they  are  without 
vanity. 

I  am,  with  every  consideration  and  esteem, 
Yours  very  truly, 

LUCIANO  GOMEZ. 

APPENDIX  F. 

Operation  of  the  Philippine  Coinage  System. 
(Special  despatch  to  Financial  America,  May  13,  1912.) 

WASHINGTON,  May  12. — A  statement  of  the  operation 
of  the  Philippine  coinage  system  prepared  by  the  Bureau 
of  Insular  Affairs,  for  Charles  A.  Conant,  of  New  York, 
shows  that  the  net  profits  derived  from  seigniorage  on  the 
silver  coinage,  the  sale  of  drafts,  and  interest  on  deposits 
of  the  gold  reserve  fund,  during  the  eight  years  which  the 
system  has  been  in  operation,  have  reached  more  than 
$10,000,000,  and  amount  to  more  than  45%  of  the  out- 
standing circulation.  The  gold  standard  fund,  which  has 
been  built  up  entirely  from  these  profits,  amounted  on 
June  30,  1911,  to  $10,308,877,  having  increased  about 
$620,000  during  the  fiscal  year. 

A  tabulation  prepared  for  each  year  shows  the  profits 
from  seigniorage  during  the  past  five  years  alone  to  have 
been  $8,294,536.  To  this  should  be  added  the  seigniorage 
realized  on  the  earlier  coinage  from  1904  to  1906,  stated 
in  the  annual  report  of  the  latter  year  at  $1,345,955.  The 
receipts  from  the  sale  of  drafts  and  telegraphic  transfers 
during  the  entire  period  of  the  operation  of  the  system 
have  been  $762,522,  and  the  interest  received  on  deposits 
of  the  gold  standard  fund  in  various  American  banks 
have  been  $1,181,790.  There  are  three  items  of  some  im- 
portance on  the  other  side  of  the  account, — cost  of  coin- 
age and  transportation,  $1,125,054;  freight  and  insur- 


130 

ance,  $41,732,  and  interest  on  certificates  of  indebtedness, 
$726,741,  but  the  last  item  is  partially  offset  by  the  pre- 
miums realized  on  certificates  of  indebtedness,  which 
amounted  to  $267,720.  Interest  on  certificates  of  indebt- 
edness and  the  cost  of  coinage  have  become  negligible 
quantities  now  that  the  system  is  in  full  operation. 

Certificates  of  indebtedness  for  one  year  were  issued 
at  the  time  of  the  inauguration  of  the  system  in  order 
to  obtain  bullion  necessary  for  coinage,  but  they  were 
redeemed  when  the  coinage  was  executed  from  the 
seigniorage  profits  which  were  available  in  excess  of  the 
amount  required  for  an  adequate  reserve  fund.  All  such 
certificates  were  retired  by  the  close  of  the  fiscal  year 
1908  and  interest  ceased  early  in  the  next  fiscal  year. 
The  cost  of  coinage  was  enhanced  by  the  necessity  of  the 
recoinage  which  became  necessary  in  consequence  of  the 
rise  in  the  price  of  silver  buillon  in  1906,  but  the  recoin- 
age yielded  the  larger  part  of  the  seigniorage  profits, 
affording  a  large  net  gain  to  the  gold  reserve  fund. 

The  total  circulation  of  the  Philippine  Islands  as 
reported  by  Senor  Araneta,  the  Secretary  of  Finance  and 
Justice,  for  the  fiscal  year  1911,  was  48,155,587  pesos, 
representing  about  $24,077,000.  This  sum,  so  far  as  the 
Government  obligations  are  concerned,  is  subject  to  the 
deduction  of  $1,695,000  in  the  notes  of  the  Spanish- 
Filipino  Bank,  leaving  a  net  circulation  of  Government 
currency  of  about  $22,382,000.  Against  this  sum  the  gold 
standard  fund  of  $10,308,877  constituted  a  ratio  of  more 
than  46%.  In  consequence  of  this  excess  above  reserve 
requirements,  a  law  was  passed  by  the  Philippine  Legis- 
lature on  Dec.  8,  1911,  providing  that  the  gold  standard 
fund  should  be  reduced  to  35%  of  the  money  in  circula- 
tion, exclusive  of  the  certificates  protected  by  a  gold  re- 
serve, and  that  the  excess  above  this  amount  should  be 
covered  into  the  general  Treasury  of  the  Philippine 
Islands. 

[THE  END] 


